When it comes to planning for unexpected health care costs, most people have three options: Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs) and garden-variety health insurance. Some families opt for one over the other, while others combine products like FSAs or HSAs with health insurance plans. The problem is that many consumers get confused when it comes to their health care options and products, often confusing an HSA for health insurance or even for an FSA, when the product itself is quite different. Before selecting your healthcare options for the upcoming calendar year, it’s essential to examine the pros and cons that come with an HSA.
What is a Health Savings Account?
Health Savings Accounts are newer and improved versions of medical savings accounts or even more commonly known FSAs. An HSA is similar in make up to an IRA, except instead of being allocated for retirement, it is designated exclusively to healthcare expenses.
How are HSAs Typically Used?
Most consumers combine an HSA with high deductible health insurance policies. Whatever money is saved in the HSA usually gets applied to the medical deductible, on an as needed basis. Whatever amount goes unused stays in the account, accruing tax-free interest.
Advantages of HSA Accounts
HSAs come with obvious tax advantages. Every dime you deposit into an HSA is tax exempt from federal (and sometimes state) taxes. Interest earned is also exempt. Additionally, all money you withdraw from your HSA that you use to pay for qualified medical expenses, is also tax exempt.
HSAs are portable. An HSA moves with you from one job to the next, and does not lose monetary value or interest during the transition.
HSAs offer long-term savings benefits. After age 64, you can withdraw some or all of your savings from your HSA for any non-medical reason, sans penalty or taxation.
Disadvantages
You could be subjected to additional tax on surplus money. Whatever money you do not spend on medical care is added to your gross income each year, at a 10 percent tax rate until age 64.
You have to have a high deductible on your health insurance. To qualify for an HSA plan with most employers, you must maintain a health insurance plan with a minimum $1000 deductible for single persons and a minimum $2000 deductible for family coverage.
Some HSAs come with out-of-pocket maximums. Depending on the terms of your HSA, some out-of-pocket expenses cannot be more than $5000 for individuals and $10,000 for families.
Why Open an HSA?
Even in light of the drawbacks associated with an HSA, the savings plan provides lower health insurance premiums, is a secure start-up investing tool and provides unparalleled tax benefits. However, an HSA is better suited for someone under 64-years of age, in good health, and with no disabilities or chronic medical conditions in order to achieve the greatest financial benefit. If this sounds like you, talk to your human resources department or manager for more details on company sponsored healthcare savings accounts.