Health Savings Accounts: Do they make sense for me?Submitted by Mission Financial Planning on May 2nd, 2013
HSA plans have been available since 2004, with few changes. Think of this as a medical IRA. You own it and control it, and it follows you from employer to employer.
There are three parts to a HSA. The health insurance policy that is approved for HSA plans, a savings account that you can choose to fund or not, and an administrator for processing claims and deposits through the savings fund.
When does an HSA plan work best? When you are generally healthy and not incurring high insurance claims, and are willing to fund the savings account to take advantage of the tax benefits.
By design, these plans have higher deductibles and do not include features such as an office copay or prescription drug card. Nothing is paid by the insurance until a deductible is met. This stripped-down design helps to keep insurance costs lower. Some plans will then pay 100% after the deductible, some will pay 80%. Also, some will have one deductible to be met per family while other plans will have two deductibles that can be met in a family. The insurance portion covers the typical claims that any health insurance policy will cover. However, the savings fund adds a much larger range of expenses that can be reimbursed.
The savings fund is separate from the insurance policy. You may choose to fund or not to fund it. When funding, you may do so at any time throughout the year. Contribution levels are capped and adjusted each year. For 2013, the Single maximum is $3450 and the Family maximum (when more than one person is covered) is $6450. If over age 55 then an additional $1000 “catch-up” contribution may be added each year. Contributions to the savings fund are tax deductible in the year they are made. Withdrawals from the fund to pay for qualified healthcare expenses are income tax-free. Therefore, as the money cycles through you end up paying for healthcare expenses on a tax-free basis.
There are restrictions for what is considered a qualified expense. The IRS website has a listing but you’ll find that it includes items not usually covered by most insurance policies. This includes, dental expenses (not paid out as insurance but reimbursed at 100% from your savings account), eyeglasses, contact lenses and solution, laser eye surgery, acupuncture, artificial limbs, orthopedic shoes, smoking cessation programs, chiropractic, prescription medications (over the counter supplements and other items are generally not covered unless there is a doctor’s prescription for them). In addition, long term care insurance premiums can be paid from the savings fund, subject to limits. This is a great benefit to help reduce the premium cost of this type of coverage. Also, a rollover from an IRA to your HSA savings fund can help establish the funding for your savings account. This could be attractive where there is a small IRA or one where the income will not be needed and it’s desired that the funds be used prior to retirement for healthcare expenses.
The administration of the savings account typically has a fee that starts around $40 annually and is taken from the tax-deductible contribution. Some plans will offer a menu of additional features that can be added for additional fees. A debit card is issued and tied specifically to your savings account. This eliminates the need for check writing and eliminates transaction fees when withdrawals are processed. Statements are sent out showing money coming in and going out each month. Note that you are required to keep records of expense reimbursements. If the IRS would check then it’s up to you to justify that money was spent for a qualified expense.
What if I get to age 65 and have money left in my savings account? Or, what if I start a plan but don’t keep it to age 65? Any money left in your savings fund is not lost but can be used to reimburse yourself or dependents for qualified healthcare expenses. If you no longer have the qualified health insurance then you simply can’t make new contributions to the savings fund but can still access and take reimbursements for expenses. These funds have also been used as a secondary retirement fund. Money withdrawn after 65 is taxed as ordinary income at your tax bracket at the time you receive it.
When does an HSA plan fit best? When people are generally healthy and not having high claims each month. Also when you are willing to fund the savings account and take advantage of the tax benefits. Since you’re spending your own money from the savings account, people tend to make better healthcare decisions and purchase their care as an informed consumer rather than spending with no regard for cost. If you’re wondering about Health Savings Accounts: Do they make sense for me? The IRS website has a listing but includes items not covered by most insurance.Finally, it’s important to note that HSAs are not eliminated by Obamacare.
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