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What You Need to Know About Health Savings Accounts

What You Need to Know About Health Savings Accounts

Fidelity Investments recently announced its largest annual increase in Health Savings Accounts. In 2011, its HSA customer base jumped 61 percent to 119,000 from 74,000 at the end of 2010. As of February of this year, Fidelity administered HSA assets of $327 million, up 43 percent from $229 million one year prior.

Employers like HSAs because they help control escalating costs and employees like them because of their long-term savings potential and tax advantages. Since being enacted in 2003, as part of a Medicare reform law, more than 6.8 million health savings accounts have been established, collectively holding in excess of $12.4 billion, according to research conducted by Devenir, an investment firm that specializes in providing investment options for HSAs.

If you've heard about HSAs, but haven't really taken a good look at them, maybe it's time to see what all the buzz is about.

What can a HSA do for you?

First off, an HSA is a tax-advantaged savings account designed to be used only in conjunction with a High Dollar Deductible Plan (HDHP) based on guidelines set by the IRS. This year, individuals can contribute $3,100 and families $6,250.

What's good about them? They have a triple tax advantage. “You get a pre-tax or tax deductible contribution going into the account, tax-deferred growth of the earnings and income tax free when spent on a qualified Section 213(d) expense (see IRS Pub. 502) for a full list of expenses that are HSA eligible,” says Paul Ashley, an advisor with FirstPerson, an employee benefits consulting firm.

There is no use it or lose it rule with the money in the account like you see on a Flexible Spending Account, says Renee Guariglia, executive vice president for Falcone Associates, which specializes in employee benefits.

Then too, of no small consequence, a high deductible health insurance plan paired with a HSA, often costs much less in monthly premiums compared to traditional health insurance. You can use your HSA to pay for co-payments, co-insurance and qualifying medical expenses not covered by your health plan, for example, explains Carrie McLean, consumer specialist with eHealthInsurance.com. Without a tax penalty, you may not use HSA funds to pay for monthly health insurance premiums or anything other than qualifying medical expenses, she adds. Money in a HSA cannot be used for over the counter medications, unless you have a prescription from your provider, says Guariglia.

Know too, that if you withdraw funds from your HSA for non-qualified medical expenses, you need to report that on your tax return and pay taxes on it. If you are younger than age 65, you will also pay a 20 percent penalty, says Bill Ware, vice president of U.S. Bank’s Healthcare Payment Solutions.

Is a HSA Right For You?

For all the good stuff about HSAs, they aren't for everybody. “They tend to come with higher-than-average deductibles,” says McLean. Average annual deductibles for HSA-eligible plans was $3,567 for individuals and $5,685 for families (non-HSA deductibles for comparison, were $2,810 for individuals and $3,398 for families), according to McLean. “Make sure you can afford the deductible in a pinch if necessary,” she adds.

HSAs are best for individuals and families who historically incur medical expenses below the deductible chosen, says Steven Spiro, a chartered life underwriter with The Excelsior Group, an independent insurance agency. “The savings in premium should more than cover their expenses. And if they've gambled incorrectly, at least the family's maximum exposure is capped.”

Generally, HSAs work for those who rarely visit the doctor or for those whose employers help fund the account, says McLean.

Know too, that you need to keep all receipts, Explanation of Benefit (EOB) statements from your insurance carrier and bank records in the event of an audit, says Guariglia.

Make the most of your HSA

To maximize the value of an HSA over time, limit utilization of medical care when appropriate and avoid meeting your deductible ever year, if possible, says McLean.

Ask your employer to chip in. Even if your employer doesn't fully fund HSA, they may be willing to contribute toward your HSA as a component of your total compensation package. You never know until you ask.

If you're over 55, you may qualify to make an additional $1,000 contribution toward your HSA for the 2012 tax year. Talk to your tax professional.

Be sure to deduct your contributions up to the federally prescribed limits. If you don't reach those limits during 2012, one of the nice things about HSA contributions is that they can be made in the first part of 2013 (prior to tax day) and applied to qualified medical costs in 2012, points out McLean.

Simply put, says Ashley about HSAs, “Most people come out ahead.”

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nothlit | | Comment #1
Another thing to keep in mind is that your HSA contributions are also FICA (Social Security and Medicare) tax-exempt, but only if made as a payroll deduction by your employer. That's an additional 5.65% tax benefit (7.65% once the current Social Security tax cut expires). So while you can make after-tax contributions to your HSA and deduct them from your federal and (most) state income taxes, the only way to gain the FICA tax benefit is to make your contributions by payroll deduction.

I joined an HDHP/HSA plan with Aetna through my employer this year for the first time. For me, it's definitely worthwhile: my premiums for the year will total just $960, my deductible is $1500, and my maximum annual out-of-pocket limit is $3500, so even if I do have an unexpected medical issue it won't bankrupt me. Also, my employer contributes $600 to my HSA.

Before switching, I went back and ran the numbers for the last 3 years under my HMO plan and in every case I would have come out ahead under the HDHP/HSA plan. It might not make sense for everyone, but it sure makes sense for me right now. Plus I like the fact that if I don't spend all of the money in my HSA, I can withdraw it penalty free at age 65, just paying regular income tax on it at that time, which makes it like a traditional IRA.
Anonymous | | Comment #6
These accounts are really great for the brokerages that hold them. When will people understand that health insurance must be distributed across as wide a population as possible for it to have a prayer of working. Unless, of course, you "gambled" correctly. I know someone who, in less than 60 days, was diagnosed with two different cancers (prostate and brain) and has approached more than a million in medical expenses. Without good insurance the family would be dead in the water. Also, other care (nursing home, assisted care, etc.) are costs that must be paid by the individual out of pocket. Remember, HSA's put a lot of money in the hands of money managers who will tell any story to get their hands on your cash. 401k's have not lived up to their promise and HSA's won't either.
jshannon | | Comment #2
My HDHP premium with Bluecross/Blueshield is about $130/month. My workplace group policy would cost me around $40/month.
paoli2 | | Comment #3
I can't see how an HSA healthplan would ever work for anyone but the healthy young people. People with chronic illnesses would not be able to save enough money fast enough to cover their expensive and non-ending medical bills. Seniors can't start that late in life to save money for their healthcare. They need insurance to cover even the office copays. I sure hope they don't become the insurance of choice for our country! Savings should be savings and health insurance should be to pay medical bills without sticking one with a huge deductible which makes it useless to those who really need health insurance.
TRUMPETCARE | | Comment #4
I think you are right on a HSA would probably only be effective for responsible and dedicated young working people.

When I was 20 years old (many years ago), I would probably have liked the opportunity to put away about $4K per year in a before tax HSA (I wished for a Roth also, but it came about too late in my working career).

Anyway in 25 years, that HSA would be worth about $126K and that is only earning 3% rate. At 6%, it would be worth about $220K.
TRUMPETCARE | | Comment #5
And one other note, this is just at 3%. If a 20 year old, put $4K per year for 45 years, retired at age 65. His HSA would be worth about $371K. I guess the question is though what that might be worth in real dollars with inflation factored in the formula. But I suppose, it might be invested in Inflation type securities to take care of that type of problem.
Anonymous | | Comment #7
You do understand the average adult retiree has a relative pittance in their "retirement" plan. Most have nothing substantial. The idea that young people are going to responsibly sock away enough for old age has been proven false time and again. Oh, and 300K thirty years down the road won't buy a lot of health care...you better be in/out in a hurry! The real solution is universal insurance with income-based co-pays at the doctor/hospital door. You won't run to the doctor with a runny nose if there's a $50 entrance fee.
TRUMPETCARE | | Comment #9
This tax saving article has some more information and includes HSA. Long term earnings could be much more if you can earn higher return rates. Actually an HSA is probably better than either a Roth or Traditional IRA. For one thing, funds from the HSA can be used tax free for qualified medical expenses and after age 65, you can withdraw funds taxable at your tax rate for any expenses. And. ...no RMD (Required minimum distributions) on the HSA when you reach age 70-1/2. Along with a good health plan (yet to be seen), the HSA is icing on the cake. usatoday.com/story/money/personal finance/2017/01/28/12-smart-tax-moves
Anonymous | | Comment #8
Most people do not know that the insurer of last choice is the hospital. And, most people do not know that insurance companies LIMIT ACCESS to healthcare. Finally, if healthy people forgo insurance and "gamble", their $400k motorcyle accident is paid for by the insured. I consider national defense a form of life insurance and I don't remember seeing the opt-out option on my tax return. How about if we all buy in to the government worker plan while subsidizing those who simply can't afford it. https://opm.gov/healthcare-insurance/healthcare/ "Federal employees, retirees and their survivors enjoy the widest selection of health plans in the country." They don't report that on the nightly news, do they.
!!! | | Comment #10
Healthcare for ALL federal employees (including all our Washington politicians), retirees, etc. should only be covered under the VA. Then and only then with the healthcare for our Veterans improve and the cost to us taxpayers for all the federal employees, politicians, retirees, etc. will decrease. If they want a different healthcare option, let them pay for it at their own expense.
About time
About time | | Comment #11
The gov't should get out of the healthcare business if it will not go to single payor. Thus goodbye to ACA, Medi-cal/Medicaid, fed employees Heath plans, corporate welfare/health plans (those employers that deduct premiums on tax returns), VA, and Medicare! Too much for some and not all!