Health Savings Accounts Have More to Offer Than You Think

Health Savings Accounts Have More to Offer Than You Think
by MARY TOOTHMAN

As the number of people with high-deductible health insurance plans continues to rise, the option of Health Savings Accounts (HSAs) — 

created to help handle out-of-pocket expenses — is likely to attract more interest.

An HSA can be funded with pre-tax money, allowing for $3,400 for individual and $6,750 for families annually in 2017. It can be opened regardless of income or other tax-advantaged accounts to which a person might contribute.

HSAs are often confused with Flexible Spending Accounts (FSA),  but they are not the same at all. With an FSA, any money not spent in the year it is funded is forfeited. The money in an HSA, and anything it earns, remains until it is used.

With these plans, a person can “self-insure” part of their health care costs in exchange for lower premiums.

As medical costs have gone way up, so have the insurance premiums required to provide comprehensive coverage. By having the insured shoulder some of the risk, the high-deductible plans are able to offer insurance against catastrophic illness and injury at more affordable rates.

In exchange, the insured are responsible for paying the first medical bills out-of-pocket each year — typically $5,000 to $10,000.

Contributions are tax-deductible, and any unused funds can be accessed and spent anytime in the future. For qualified expenses, the funds will be penalty free. If funds are deducted from an employer via payroll checks, they are not subject to Medicare or Social Security taxes.

Funds that are withdrawn and used for expenses that are not medical are subject to taxes and a 20 percent penalty — unless contributors are 65 or older and/or disabled. In those circumstances, funds will be subject to taxes only, without a penalty.

Contributors need to have a high-deductible health insurance plan in order to have an HSA.

Dental and vision expenses may be included as qualified medical expenses — and these are not usually part of a health insurance plan.

Another plus is that a spouse inherits funds from an HSA will all of its benefits in the event of the contributor’s death. If a contributor has an heir who is not a spouse, the funds will revert to regular income and be taxed. A contributor may use funds to cover the expenses of a spouse or dependents.

Medical bills do not have to be paid with HSA funds if a contributor chooses to allow the funds to grow instead. HSA money can be invested anywhere. And as long as receipts are saved, medical bills can be paid with HSA funds at any time. 

After contributors reach the age of 59 1/2, there is also the option to withdraw the money for non-healthcare expenses and then pay federal income taxes on it. 

This offers protection from the concern of what will happen if the money is not needed for health care. In that case, the funds can be used like an IRA in the future.