Health Savings Account: Is It Right for You?

by Lorraine Ash 2. March 2015

HSA

When you’re choosing a health plan, there are many factors that may affect your decision. If you want an option with flexibility, a high level of choice, and tax-advantaged savings, a high deductible health plan with a Health Savings Account (HSA) might be the right choice for you.

What Are HSAs?

HSAs are tax-advantaged savings accounts that accompany high deductible health plans (HDHPs).

HSAs were created in 2003 to provide individuals who have HDHPs with a tax-preferred method of saving money for medical expenses. There are certain advantages to putting money into these accounts, including investment earnings and favorable tax treatment. The rationale behind the HSA/HDHP combination is that people will have a clearer idea of their medical costs and more control over their spending, enabling them to reduce their medical costs.

HSA money can be used tax-free when paying for qualified medical expenses, helping you pay your HDHP’s larger deductible. At the end of the year, you keep any unspent money in your HSA. This rolled over money can grow with tax-deferred investment earnings, and if it’s used to pay for qualified medical expenses, then the money will continue to be tax-free. Your HSA and the money in it belongs to you—not your employer or insurance company.

An HSA can be a tremendous asset as you save for and pay medical bills because it gives you tax advantages, more control over your own spending and the ability to save for future expenses.

Is an HSA Right for You?

HSAs are a growing trend in health care and offer many advantages, but whether it’s the right choice for you depends on several factors.

Comparing HSA/HDHPs to traditional health plans can be difficult, as each has pros and cons. For example, traditional health plans typically have higher monthly premiums, a smaller deductible and fixed co-pays. You pay fewer out-of-pocket costs due to the lower deductible, but you will pay more each month in premiums.

HDHPs with HSAs generally have lower monthly premiums and a higher deductible. You may pay more out-of-pocket medical expenses, but you can use your HSA to cover those costs, and you pay less each month for your premium.

The decision is different for each individual. If you are generally healthy and/or have a reasonable idea of your annual health care expenses, then you could save a lot of money from the lower premiums and valuable tax-advantaged account with an HSA/HDHP plan. For example, even someone with a chronic condition could take advantage of an HSA/HDHP plan if he or she has a good idea of his/her annual expenses and then budgets enough money to cover cost of care.

However, if you are older, more prone to illness or unexpected medical conditions, or prefer certainty in medical costs over the possible risk of unexpected out-of-pocket expenses, you may want to stick with a traditional plan. You’ll pay more in monthly premiums, but you will have a lower deductible and fixed co-pay.

How Do HSAs Work?

To have an HSA and make contributions to the account, you must meet several basic qualifications. Here’s what you need to know to start saving with an HSA.

HSA Eligibility

In order to qualify for an HSA, you must be an adult who meets the following qualifications:

  • Have coverage under an HSA-qualified, high deductible health plan (HDHP).
  • Have no other health insurance plan (this exclusion does not apply to certain other types of insurance, such as dental, vision, disability or long-term care coverage).
  • Are not enrolled in Medicare.
  • Cannot be claimed as a dependent on someone else’s tax return.

HSAs must be used with an HDHP. To qualify as an HDHP, a health plan must satisfy requirements for the minimum annual deductible and the maximum out-of-pocket expenses.

In 2014, the minimum annual deductible for a qualifying HDHP was $1,250 for an individual and $2,500 for a family. For 2015, the HDHP minimum deductible is $1,300 for an individual and $2,600 for a family.

In addition, annual out-of-pocket expenses under the plan (including deductibles, co-pays and co-insurance) cannot exceed $6,350 in 2014 and $6,450 in 2015 for single coverage, and $12,700 in 2014 and $12,900 in 2015 for family coverage.

Who Can Contribute?

Contributions to your HSA can be made by anyone, including you, your employer or a family member; the combined contributions of you and your employer (and anyone else making contributions to your HSA) cannot exceed the HSA maximum contribution limit.

Contributions to the account must stop once you are enrolled in Medicare. However, you can still use your HSA funds to pay for medical expenses tax-free.

Using Your HSA

An HSA is managed by the account holder, giving you the choice of when to use your HSA dollars. You can begin using your HSA money as soon as your account is activated and contributions have been made. You can use your HSA account for any purpose, including paying expenses that are not qualified medical expenses. However, you only get the tax benefits of an HSA when you use the account for qualified medical expenses. If you use it for another purpose, you will be required to pay income tax on the withdrawal, and you may also be required to pay another 20 percent tax unless you make the withdrawal after you reach age 65, become disabled or after your death.

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