Better understanding your personal health financial plans
Health savings accounts, or HSA’s, are a very common piece of high deductible policies that many Americans already have in their current health insurance. However, it is one of the least understood elements of personal financial plans and therein lies the problem.
First, let’s review the basics of a health savings account. According to the website, http://hsacenter.com, an HSA “combines high deductible health insurance with a tax-favored savings account.”
The money in this account can be used by you to assist in paying your deductibles when visiting doctor’s offices or hospitals and the insurance picks up the difference once the deductible is met. The unused money in the account collects interest as with any other savings account and is yours to keep.
It’s important to note that the money in the account can only be used to help pay medical expenses and is not available to use on every day expenses. If you withdraw money to pay for non-qualified medical expenses, you will be taxed at your personal income tax rate, plus 20 percent if you’re under the age of 65.
Some of the things an HSA can be used for are:
- Health insurance premiums when you’re between jobs.
- Qualified long-term care premiums.
- Medicare premiums and out of pocket expenses.
- Living expenses after age 65 such as ordinary income taxes.
Some of the advantages of an HSA are:
- You decide how much money to put into the account.
- It’s 100 percent tax-deductible (up to the legal limit).
- Tax-free withdrawals to pay for qualified medical expenses (including dental and vision).
- Tax-deferred interest earnings.
- HSA money is yours. An HSA, unlike a flexible spending account (FSA), doesn’t forfeit your money at the end of the year; it’s yours to keep.
- Having an HSA does not impact your ability to have an IRA.
With anything, there are potential disadvantages as well. Life is unpredictable, and a health savings account can only help you as long as there is money to pull from, so budgeting is very important to ensure funds are there when a medical emergency arises. As mentioned on the website mayoclinic.com, information about the accounts can be different wherever you look so be sure to do thorough research about your plan and the company offering it. HSA’s can be seen as mostly beneficial to a younger subscriber as older, sicker people may not have the money to put aside into the account. If you do take money out of the account for non-medical expenses, you will have to pay taxes on it.
You might be wondering why it only comes with high deductible insurance. According to the website http://hsacenter.com, “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 typical minimum annual deductible for an individual qualified HSA plan was $1,250 and $2,500 for a qualified family plan.
According to high deductible health insurance plans, once you meet the year’s deductible, your health insurance begins paying the remaining coverage expenses in accordance with your plan’s conditions. Some plans may even pay 100 percent of covered expenses after the year’s deductible is met.
In order to qualify for an HSA, you must be covered by a qualified high deductible health insurance plan, not covered under any other health insurance, not enrolled in any Medicare and not a dependent.
The Internal Revenue Code Section 213(d) specifies that qualified medical expenses deal primarily with alleviating or preventing physical and mental illness, which can include dental and vision. Things that don’t qualify include, but are not limited to, cosmetic surgery, health club memberships, maternity clothing and household necessities such as toothpaste. Generally speaking, HSA money cannot be used to pay insurance premiums, though there are some exceptions.
If you want to compare the cost of your health insurance to an HSA plan, estimate your potential tax savings, or calculate how much you would save over time with an HSA, visit http://hsacenter.com and click on their “HSA calculators” link in the menu bar.
When talking to healthcare providers about an HSA, be sure to ask about minimum balances, penalties and other such fees and, as with any account, be diligent in managing it to ensure a positive outcome.