What Is An HSA?
A Health Savings Account is a tax-advantaged bank or savings account combined with a qualified high deductible insurance policy. It provides a financial planning approach to managing the cost of healthcare. It is designed to encourage the participant to take control of his/her healthcare decisions by building a reserve to fund first dollar medical costs. If the owner and family stay relatively healthy as most Americans do (73% have less than $500 in medical costs each year) the account grows and can eventually be used as a second retirement account. Following are some features of an HSA.
Reduce Health Insurance Premiums
This aspect of an HSA has unfortunately become somewhat diminished with the advent of new ACA compliant plans. Most all of the new plans now follow the original HSA model with higher deductibles and a maximum out of pocket cap. The new plans, including HSAs, now generally have a $6,350 cap for individuals, and $12,700 cap for families. The deductible may be a little lower than these numbers, but there is usually a coinsurance of 20-50% which the insured must pay until they have reached the maximum out of pocket. The insurance covers 100% for the rest of the calendar year after that. The plans with the higher initial deductible and larger coinsurance will have lower premiums and vice versa. It comes down to how fast do you want to get to the maximum out of pocket. You still save money if you are healthy and take the higher deductible, it is just not as readily apparent as before. There are still significant advantages of an HSA over a non-qualified plan.
Reduce Federal Income Taxes
Contributions to an HSA up to $6,450 for a family and $3,250 for an individual can still be deducted from federal taxable income. Contributions are not subject to withholding, estimated taxes or other employment taxes such as FICA. After age 55 individuals can also contribute an extra $1,000 per year as a catchup provision similar to a traditional IRA.
Earn Interest Tax Free
All interest, dividends, and capital gains earned in a Health Savings Account are tax deferred and when used for qualified medical expenses are tax-free. And since any unused funds roll over to the next year, as your account grows, additional self-directed options such as mutual fund investments are available.
Can Be Used As An Additional Retirement Account
Money remaining in an HSA after age 65 can be used for anything (even non-medical expenses) and withdrawals are treated just like an IRA. Money left in the account continues to accrue earnings on a tax-deferred basis. Prior to age 65 funds withdrawn for non-medical expenses are subject to a 20% penalty.
Pay For Expanded Medical Services
Pre-tax dollars can be used to pay for medical services not covered by traditional health plans. Some examples are laser eye surgery, dental, eyeglasses, acupuncture, kids' braces, long term care premiums, and more. For a more extensive list of covered items see HSA Qualified Expenses list.
Who Is Eligible
Anyone age 18 or older and who has a qualified High Deductible Health Plan can establish a Health Savings Account. They are available in both the group and individual markets. If an employer contributes to an employee's HSA, that money becomes the employee's and can be used as the employee wishes and even goes with the employee if he changes jobs. With the implementation of the ACA, pre-existing conditions no longer are relevant, so anyone can apply.