Health Savings Account (HSA) are accounts created for individuals who are covered under high-deductible health plans to pay for future medical expenses. Contributions made to the account by the individual are tax deductible, earnings on the account are tax deferred, and withdrawals for qualified medical expenses are tax free. HSAs were made available January 1, 2004, and further enhanced when President Bush signed into law the Health Opportunity Patient Empowerment Act.
An HSA plan has two components: a qualified high-deductible health insurance plan, and an individual savings account.
To be eligible to enroll in an HSA, the individual cannot be claimed as a dependent on someone else’s tax return or entitled to Medicare benefits. An individual or family must also be covered by a qualified high-deductible health plan (HDHP). A qualified HDHP will have a minimum annual deductible for an individual of $1,200 and a maximum out of pocket expense of $5,950. For family coverage, the minimum annual deductible must be at least $2,400, with a maximum out of pocket expense of $11,900. There are other requirements that these plans will have to meet that set them apart from traditional health care plans. An insurance carrier or licensed insurance professional should verify that the plan in question is actually a qualified plan.
The savings account portion has to be specifically designated as an HSA, with a qualified provider (usually a bank), as recognized by the Treasury Department. This account is designed to pay for routine medical expenses and/or provide savings for the future. For 2010 and 2011, the maximum contribution for an eligible individual with self-only coverage is $3,050. The maximum contribution for an eligible individual with family coverage is $6,150. These limits will be indexed for inflation. Individuals 55 and older can make an additional catch-up contribution of $1,000.
Money put into the account can be used either during the year or accumulated in the account. There is no “use-it-or-lose-it” provision, so unused amounts are rolled forward indefinitely. Funds in an HSA can be invested in a manner similar to investments in an Individual Retirement Account (IRA). Investment earnings are sheltered from taxation, until the money is withdrawn. Unlike IRAs, HSAs do not have required minimum distributions when you reach 70 1/2. The law also allows for a one-time transfer of funds from an IRA to an HSA. HSAs can also be passed on to your heirs. Surviving spouses inherit HSAs, as if the account were their own; however, when passed on to children or grandchildren, it becomes a taxable event like inheriting an IRA.
Allowable medical expenses are defined by the IRS and are much broader than most insurance carriers (i.e., includes dental and vision). In most cases, however, health insurance premiums are not qualified expenses. Individuals can also deduct dollars contributed to the HSA account from their gross income, resulting in tax-free medical dollars.
The advantages of an HSA to an employer are several. In most cases, by changing to an HSA, an employer lowers the fixed costs associated with offering health insurance by lowering their premiums. Dollars can be directly allocated to employee accounts, thus contributing more benefit dollars to employees while incenting them to be more involved with their own health care decisions. Employer contributions made to an HSA are also made with pre-tax dollars.
HSAs can be good options for single adults or couples with no children who are in good health, as these accounts allow you to save pre-tax dollars for medical expenses. They can also be advantageous for high income, high net worth families who have the cash flow to handle the $200 and $300 doctor bills as they come. Individuals interested in HSAs need to consider their cash flow, general health and how many doctor visits they anticipate during the year. You do not want to put yourself in a bad position by opting for a high-deductible health plan. For more information on HSAs and if one could be right for you, please contact Henssler Financial at 770-429-9166 or experts@henssler.com.
Disclosures
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.
