Who should contribute to a Health Savings Account (HSA)?
In the quest to find just the right healthcare plan, many people dismiss the Healthcare Savings Account (HSA) as an impractical option. However an HSA can be the best choice for your healthcare coverage if managed correctly.
An HSA is a special type of savings account into which you can deposit money for use on approved healthcare expenses. HSAs are combined with a high-deductible insurance plan to cover expenses not paid for by your health insurance. This gives you the cash to pay for your own healthcare up to a certain point, after which your high-deductible healthcare plan, known as an HDHP, picks up the rest of the cost.
Above the Line Income
One of the biggest advantages of an HSA is the fact that for every contribution you make up to IRS limits, you receive an “above-the-line” deduction. Above-the-line deductions are taken before the calculation of your gross income, on the front page of a 1040 form. This means that, unlike your itemized deductions, every penny of your contributions counts as a direct deduction from your income, so you pay less overall in income taxes.
Not only do you get a tax deduction for your contributions to your HSA, you also get tax-free withdrawals as long as your money is used for qualified healthcare expenses or for retirement. Money in an HSA, unlike that in a Flexible Spending Account or FSA, rolls over from year to year and can accumulate. Therefore, you can put the maximum amount in your HSA each year without fear that you will lose any of that money if you do not spend it by a certain date.
Can I transfer my Health Saving Account?
As long as you maintain an HSA, you can transfer your account to any healthcare plan that allows an HDHP and HSA combination. You can start with one health insurance company and transfer your HSA intact to a new company every year, if you choose. This allows you to shop for the best prices and coverage for your HDHP.
What are the downfalls of a HSA account?
Some people are afraid of the concept of a high-deductible insurance plan; likely this fear grows out of the assumption that the deductibles on these plans will be so high that the individual contributions to an HSA will be out of reach for most people. Actually, the amount a high-deductible plan can charge is capped by law. The minimum amount defined by law for a high-deductible plan must be $1,200 for an individual and $2,400 for a family. Some plans will have higher deductibles than this, but you are free to shop for those with the lowest deductible when you set up your HSA. The maximum out-of-pocket costs allowed by law under an HDHP are $5,950 for an individual and $11,900 for a family.
The worst-case scenario for someone contemplating an HSA/HDHP combination is opening the account and immediately having a high-cost medical emergency, such as a hospitalization or surgery. In that case, you will be responsible for your entire bill until your deductible is met. However, if you can build up the amount of your deductible in your HSA before having to make withdrawals, your continuing contributions will most likely cover your outgoing expenses. One way to do this is to make larger contributions in the first few months then scale your contributions back to a more manageable level. It may also help to consider an HSA when you have had a small cash windfall, as when you get back an income tax return and can open the account with your deductible amount already intact.
Who can benefit from a Health Savings Account?
Even if you can only contribute a set amount each month to an HSA, however, it can still be a good idea to have one if you are basically healthy and do not usually visit the doctor or take large amounts of medication. Even if you do have an ongoing health issue, an HSA may still be a good option for you to control your costs over the course of a year. For example, if you are taking ten medications every day, and several of them are Tier 3 prescriptions, your co-pays under your current plan could easily add up to $500 to $700 each month. If you had an HSA, you might pay $1,500, or three months’ worth of co-pays, then you would pay nothing else for the rest of the year. On the other hand, under your current plan, you would pay $6,000 minimum in co-pays over the course of the year.
HSAs are ideal for those who take large numbers of medications or who can discipline themselves to pay out the monthly amount necessary for the maintenance of an HSA and who want the tax benefits of these types of accounts.