Health Savings Accounts
No doubt about it, medical expenses – even if you have health insurance coverage – can be steep. However, if your policy has a high deductible, you may be able to use a Health Savings Account to pay for some very common (and often pricey) out-of-pocket medical expenses at a tax advantage.
Why have an HSA?
Health Savings Accounts (HSAs) are vehicles that allow you to save for certain medical expenses that aren’t covered by insurance with pre-tax dollars. Contributions to these accounts not only reduce your taxable income, but withdrawals and investment earnings are tax-free as long as you use the money for qualified healthcare costs. Even better, you can deduct your HSA contributions on your income taxes, whether you itemize or take the standard deduction.
HSAs are only compatible with high-deductible health insurance plans. A deductible is the amount of money that you are responsible for before your insurance coverage begins to pay out. The upside to high-deductible health insurance plans is the affordable premiums. The downside, however, is that you could be out thousands of dollars before your insurance company pays a penny. HSAs were developed to bridge this gap. Because of all the tax advantages, they can greatly reduce the amount you have to pay for those uncovered medical costs.
Who can open an HSA?
In order to be eligible for an HSA, you must meet certain conditions:
- You are covered under a high deductible health plan (HDHP). Read more about these types of plans at www.irs.gov/publications/p969.
- You have no other health coverage except what is permitted under Other health coverage.
- You aren’t enrolled in Medicare.
- You can’t be claimed as a dependent on someone else’s tax return.
How to set up an account
If you buy the insurance policy on your own, you can sign up for an HSA at such financial institutions as banks, credit unions, and insurance companies. Your insurance agent should also be able to help guide you to policies that qualify for HSAs.
Many people have group health insurance coverage through their employer, and if that policy qualifies as high-deductible, you will be able to sign up for an HSA during your open-enrollment period. Depending on your company’s policy, your employer may fund all or a portion of the HSA, or they may match contributions.
What are qualified medical expenses?
You can withdraw the money you deposit in an HSA to pay for such routine health care costs as:
- Dental care
- Maternity expenses
- Long-term care insurance premiums
- Mental healthcare
- Physical therapy
- Alternative healthcare (including acupuncture, homeopathy, traditional Chinese medicine, and nutritional consulting)
- Ambulance fees
- Preventative healthcare (including blood tests, vaccines, and lab tests)
- Prescription drugs
- Special needs health care (including wheelchairs, guide dogs, and special classes)
HSAs have maximum annual contribution limits. While there is no “use it or lose it” rule (any money you don’t spend simply rolls over for the next year), there are spending limits. Each year these restrictions change, so check with the IRS for account limit information: log on to www.irs.gov, or call their toll-free hotline: 1-800-829-1040.
Also, be aware that if you use the money for non-medical expenses before the age of 65, you will be charged a 10 percent early withdrawal penalty, and will have to pay income taxes on the amount you take out.
HSAs make good financial sense, but they don’t open by themselves – it requires action on your part. Therefore, if you have a high-deductible health insurance policy through work, talk with your human resources department to find out how (and when) you can sign up. If you obtain the policy on your own, contact your financial institution or insurance agent. You will need to decide how much money you want contribute, and if you want to use the plan to pay for current medical costs or if you’d rather invest for future expenses.