While the overall use of the health savings account is increasing, many are apprehensive about enrolling in the high deductible insurance plans that must accompany the savings account, not sure if enrolling in HSA eligible plans will save or cost them more money in the end.
Medical expenses have been shown to be the largest cause of United States bankruptcy filings. Taking advantage of a health savings account could be the answer to preparing and saving for future out of pocket costs related to healthcare and avoiding financial pitfalls.
Learning the basics, disadvantages and advantages of health savings accounts is the first step towards determining whether a high deductible insurance plan paired with a HSA is right for you and your family.
Health savings accounts were introduced initially in 2003 in order to encourage savings for future medical related expenses related to high deductible health plans. Supporters of HSAs maintain that the savings vehicle makes consumers more cost conscious by having them spend their own income on medical expenses. Since their establishment, federal limits on savings have been increased along with their popularity. Currently, an individual can contribute $3250 and families can contribute $6450.
HSAs can be established by individuals enrolled in high deductible health insurance plans (employer sponsored or private) that have no other first-dollar coverage. In general, high deductible health plans have lower premiums and higher deductibles than traditional health insurance plans.
Both employers and employees can contribute to a health savings account on the employee’s behalf. The money saved in a HSA is tax deductible and can be spent on a number of health related expenses.
Having many similarities to traditional IRAs, interest income earned in the heath savings account are not federally taxed as long as the funds are spent on qualified medical expenses. Qualified expenses include those that involve cost-sharing related to the high deductible health insurance plan such as: co-payments, deductibles and coinsurance. Other covered expenses include, but are not limited to dental expenses, vision expenses, certain maternity expenses and prescriptions.
Health savings accounts are provided by many insurance companies, banks and financial instructions.
- Unused funds in health savings accounts can rollover from year to year for future use unlike funds saved in a flexible spending account.
- Funds accrued in health savings accounts can still be used even if associated high deductible health insurance plan has since ended, employment has been terminated, or employers change.
- Contributions made by employers may be excluded from gross income.
- Qualified medical expenses include expenses incurred by spouses and dependents claimed on the individual’s federal tax return.
- Health savings accounts can have establishment fees depending on where they are established.
- Funds not spent on qualified medical expenses before the age of 65 are subject to gross income taxation and an additional 20% penalty.
- Because many health savings accounts are invested in stocks, bonds and mutual funds, account values can decline over time.
Health insurance elections and plan participation should be reviewed from year to year, using the prior year’s medical expenditures as a basis for whether a health savings plan is beneficial and how much should be contributed.