Health Savings Account


About Your Health Savings Account

A Health Savings Account may be an excellent idea if you have certain health plans.  While we extensively cover the similar sounding but actually quite unrelated health reimbursement accounts, given that those types of flexible spending account are quite popular with a wide variety of family, we do not provide as much coverage of HSAs.  A health savings account is what is called a tax-advantaged (basically meaning that many people can save on their taxes with this government sponsored plan) perk available to taxpayers who have particularly high cost health plans.  These taxpayers can put money aside, without paying taxes on that money, for future health care costs.  And unlike the health reimbursement account, the unspent health savings account funds can roll over year after year.  Another subtle but important difference between the two types of account is that the health savings account is owned by the person, not by the business she or he works for.  To qualify for a health savings account you need to be a person whose only medical insurance is a high deductible plan, meaning that you will likely have high out-of-pocket costs for your current or future medical care.  Your earnings from your health savings account are not taxed, but should you use it for expenses other than those that qualify, you will pay a penalty similar to early withdrawal of retirement funds.

Unlike other tax advantages, the HSA benefits do not phase out at higher income levels, so it may be a little easier to decide whether it is a good decision for you.  That said, an HSA is not for everyone and you should still get independent advice and guidance from someone who knows your unique financial situation.  WE can help by providing general information and advice, but anyone with any type of unique financial situation should definitely pursue a specific recommendation.

Advantages of a Health Savings Account

For many people with a high deductible health plan (HDHP), the health savings account is a good choice, given that it is likely that at some point you will face a large bill on your medical care.  You have a high deductible health plan and that could mean that at some point you’ll need to tap into that deductible, so being able to do tax-free can be quite an advantage.  While these saving may not be this year or anytime soon, a health savings account does roll over year after year so there is no worry about spending out your plan like there is with other forms of flexible spending account.  Many people turn down a high deductible health plan worried about the potential out-of-pocket costs, but a health savings account gives you the opportunity to mitigate those costs with tax savings.  So, basically, the advantages of an HSA is that you have some money set aside tax-free to use on medical expenses – sort of akin to having a savings account that you can fill with pre-tax money from your work but you can only withdraw under certain circumstances.

There are some terms that may be helpful as you consider the advantages of an HSA, and most have to do with the tax implications:

  • Tax-deductible contributions: Similar to retirement accounts, any contributions you make to your health savings account are 100% deductible (up to the legal limit).  Often the payments might come out of your paycheck before taxes are deducted making your tax burden that much lower.  You will then only be taxed on the earnings that come after that money is taken out.
  • Tax-free savings: This may sound similar but what tax-free means in this case, as it relates to your HSA, is that when you withdraw money to pay for any qualified medical or dental expenses it is not taxed.  This is different from how other types of savings accounts, such as moist retirement accounts, treat money that is withdrawn.  In those cases money that is withdrawn may be taxed as income.
  • Tax-deferred interest accrual: Another difference between the HSA and other savings accounts such as retirement accounts is that the interest that accumulates is not only not taxed, but it is never taxed if used for a qualified medical or dental expense.  So not only is the money you put aside from your income not taxed, neither is the interest.
  • HSA money is yours: We have repeated many times that most flexible spending accounts require you to forfeit any money not used at the end of the plan year.  In this way the FSA money, even though it is put aside from your earnings, may not feel like your own.  With a health savings account the money is yours.  Of course should you withdraw it for a purpose than an eligible expense you will pay the types of taxes mentioned in the first three bullets.

Why High Deductible Health Insurance? To get the benefits of an HSA, the law requires that the savings account be combined with a qualified high deductible health insurance plan which can cost less than other health insurance plans. In 2014, the minimum annual deductible of a qualified HSA plan for an individual is $1,250 and $2,500 for a family.

Disadvantages of a Health Savings Account

Of course the potential disadvantage of a health savings account is that you might not get the savings if you do not use the account.  While most people who do start an HSA eventually use the money saved it is possible that you will not need it.  Now at least there are not limits to how long the money is there, so it is unlikely that you will forfeit any of it, you still may have money that would have otherwise come directly to you that is sitting in an account unused but inaccessible.  In a related way a disadvantage can be that while you eventually get some savings that does not occur for some number of years during which you have money put away that you cannot access.  Some might say that if you had invested that money somehow it may have increased in value more than the tax savings you get by eventually using it for a medical issue.  Of course there is also the much larger issue of whether the combination of a high deductible health plan and a health savings account is a better choice than a regular health insurance plan, and that is certainly something you need to assess carefully.

There are also some disadvantages of a health savings account that may not be quite as obvious.  For example, you have to decide how much money to set aside in your HSA, and this may be very hard to figure out.  And some who set aside a smaller amount than hey need and up skimping on medical care – perhaps especially preventative care – which can be a problem.  Of course you don’t want to overdo it with your HSA either and put aside too much money that you could otherwise use for other purposes.  Researching and trying to figure out what future medical costs will be can present quite a challenge.  The bottom line is that you don’t want to end up with a situation where you do not have enough money saved for other important projects or purposes, but you ant to have enough in your HSA so that an unexpected expense does not interfere with other financial needs you have at that time.

What happens to my Money in a HSA

One major difference between your health savings account and other FSAs such as dependent care accounts is that after you have a certain amount of money you will be able to invest it so it earn some sort of interest or financial gain.  Some HSA providers make that decision for you and choose a mutual fund or other type of investment to put your money in, while others allow you some choice.  Of course this does not change the fact that you cannot take this money out for any non-eligible expenses without paying a penalty, but it does help you earn money on the money put aside.  This is particularly important because, as we mentioned above, the money in an HSA does not have to spent during the plan year, so you may end up with a valuable balance in your health savings account.  Should your company offer different choices as far as HSA companies, or if you and your spouse each have HSAs offered at your companies and you need to choose, it may come down to the quality of the investment or the amount of choice you have regarding how your money is invested.  You need to treat the money you set aside as an investment – think of it this way: You do not want to lose all of the tax advantages you earned by using an HSA because you did not carefully research how your money will be invested.

Summary of your Health Savings Account

The following provides a summary of why you would choose a health savings account:

1. You have a high deductible health plan because it costs significantly less than regular health plans while still allowing you to pursue top quality coverage.  You do not mind that you will be paying so much out-of-pocket because the reward is greater than the likely risk, and if you really need it the plan will kick in after a fixed amount of out-of-pocket expense.

2. In order to mitigate some of the cost of your HDHP you open a Health Savings Account that will help you meet your high deductible with dollars that are taken from your earnings tax-free.  In other words, in most tax situations you save what you would have otherwise paid on that income.  And since we are talking about gross income that savings can be significant.  And to make things even better, that money that is set aside is invested in one way or another, therefore hopefully growing in value.  If you end up using that money as it is intended, for health savings account eligible expenses, then the money is never taxed.   There are no worries as there are with other flexible spending accounts that you need to spend out your health savings account during a certain plan year, since this money rolls over.  Finally, you can bring your health savings account with you to your next job.

3. There are other perks of a health savings account that you might not be aware of, including the ability to pay for health insurance premiums when you are between jobs, make long-term care premium payments, pay out-of-pocket premiums for Medicare, and even pay for some of your living expenses after you turn 65.

For much more information about a Health Savings Account, the IRS provides this publication

Conclusion:

A health savings account may be of great use to anyone with a high deductible Insurance Plan, though there are some exceptions.  In this section we will cover everything from eligible expanses to the latest innovations in HSA plans, and of course we welcome your input and experience.  We will try to update this page as new information comes out or any major rules change, but it is still important for you to read your own plan and rules carefully if you are considering a health savings account.