Created 10 years ago as part of the Medicare Prescription Drug and Modernization Act of 2003, health savings accounts (HSAs) have gained in popularity over the past decade. According to the Employee Benefit Research Institute (EBRI), more employers and employees have been contributing to HSAs in recent years, and the amount contributed to HSAs has generally been on the rise. For example, the percentage of individuals in employee-only HSAs contributing $1,500 or more rose from 21% in 2006 to 42% in 2012, while the percentage of employees contributing nothing decreased from 28% to 15% over that same period. (Sources: “HRA/HSA Health Plan Contributions Continue to Grow,” EBRI, February 20, 2013, and EBRI Notes, February 2013.) If you are eligible to contribute to an HSA, you may want to take another look at these savings plans, which could benefit your financial situation both now and in the future.
HSAs Explained
Health savings accounts help individuals and families set aside money on a tax-advantaged basis to pay for health-care costs. HSAs are typically offered by employers along with what’s known as “high-deductible health plans,” or HDHPs–health insurance plans that generally offer lower premium payments in exchange for high annual deductibles (at least $1,250 for individuals and $2,500 for families in 2013).* You must be enrolled in an HDHP in order to participate in an HSA. If your employer provides an HDHP but does not offer an HSA, you may be able to establish an account on your own through a financial institution. Self-employed individuals can also use HSAs.
Here’s how an HSA works:
- You can contribute up to $3,250 for individual coverage or $6,450 for family coverage to an HSA in 2013. If you are age 55 or older, you may also make “catch-up” contributions of up to $1,000.
- Your employer may also make contributions on your behalf.
- You can contribute in one lump sum or in periodic (e.g., monthly) amounts.
- You can make contributions for the current year up until your tax-filing deadline (generally, April 15 of the year following the year of coverage).
One of the key advantages of an HSA is that your contributions are tax deductible. If your plan is offered through your employer, you may be able to make automatic contributions on a pretax basis (similar to a work-based retirement savings plan) and any employer contributions are generally excluded from your gross taxable income as well. Moreover, you can typically select from a variety of savings and investment vehicles for your contribution dollars, and the earnings grow tax deferred until you withdraw them. Withdrawals then used for qualified medical expenses are tax free.
Permitted Expenses
You can withdraw money from your HSA to pay for qualified expenses for yourself, your spouse, or your dependents. Permitted expenses include:
- Health insurance deductibles and co-payments
- Prescription drugs
- Vision care and eyeglasses
- Dental care
- Laboratory fees
- Hearing aids and more
For a complete list of eligible expenses, please see IRS Publication 502.
On the other hand, HSA distributions that you use for nonqualified expenses are subject to income taxes and a 20% penalty tax.
Eligibility Rules
In order to be eligible for an HSA, you must have qualifying HDHP coverage. You won’t be eligible if you’re covered by another health plan (e.g., your spouse’s nonqualified health plan), if you’re 65 and enrolled in Medicare, or if someone else can claim you as a dependent. In addition, you may be ineligible if you’re covered under a flexible spending account or health reimbursement arrangement that offers coverage similar to the HSA’s.
Plans that won’t affect your eligibility include dental and vision care insurance, long-term care insurance, and disability and accident insurance.
Rollovers
Unlike flexible spending accounts, where you have to use up all the funds you set aside for a plan year by a certain date or forfeit the money, HSA funds are yours to keep. If you leave your current employer and would like to roll your HSA money into another HSA, you are typically permitted to do so. And provided you are still eligible, you can continue to save in your account on a tax-deferred basis until you enroll in Medicare.
*Total out-of-pocket costs for HDHPs cannot exceed $6,250 for individuals and $12,500 for families.
If you need assistance determining whether an HSA is right for you, contact the experts at Henssler Financial: experts@henssler.com or 770-429-9166.
Disclosures
The following information is reprinted with permission from Forefield, a division of Broadridge Financial Solutions, Inc. This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
