Pros and Cons of a Health Savings Account (HSA)
A health savings account, or HSA, allows anyone with an eligible high-deductible health plan to set aside pre-tax funds to pay for approved medical bills. Your money is held by a qualified HSA trustee (usually a bank, credit union, or similar entity) who will be used to pay or reimburse you for these approved expenses.
Who typically uses a health savings account?
People with a qualifying high-deductible health insurance plan, or HDHP, are more likely to use a health savings account.
A health insurance plan is considered an HDHP if it has:
- Minimum deductible of $ 1,400 for individual coverage and $ 2,800 for family coverage
- Maximum reimbursable expenses of $ 7,000 for individual coverage and $ 14,000 for family coverage
How health savings accounts work
Not all plans can qualify as HDHP, so check with your employer or insurance agent if you are unsure. Most employers have selected an HSA Trustee, but even if they have, you can choose your own. Different administrators charge different fees, offer variable interest rates and investment options, and may offer a variety of services such as storing receipts and the ability to transfer funds between your HSA and checking or deposit accounts. saving.
For 2021, the maximum HSA contribution is $ 3,600 for one person and $ 7,200 for family coverage. Employees who turn 55 at the end of the tax year can contribute an additional $ 1,000 as a âcatch-upâ provision.
If these contributions are deducted from your paycheck by your employer and remitted to a trustee, these funds are pre-tax, reducing your annual income by the amount you carry forward. In other words, you pay Uncle Sam less and more money stays in your pocket. Interest accrued on funds you have in this type of account is not taxable. When your balance becomes large enough, most trustees allow you to invest your funds in mutual funds, bonds, or stocks.
HSA contributions can be reduced and increased throughout the year. The IRS has extended the deadline for making contributions from the previous year to May 17, 2021, so if you haven’t maximized your contributions for 2020, you still have time to do so.
What are the advantages of a health savings account?
There are many benefits to using a health savings account, including:
- Typically, no initial deposit is required to open an account: HSAs are transferable, and you can change trustees once every 12 months. Bank and credit union HSA accounts are insured up to $ 250,000.
- Your employer or another eligible family member may contribute to your HSA although maximum contribution limits still apply. Employer contributions are not counted as income, and you can claim a tax deduction for contributions you make and for contributions from a family member.
- The funds can be used to pay for eligible medical expenses for a spouse and dependent children, even if they are not covered by your health insurance plan.
- After retirement, the funds can be used to pay premiums for Medicare or Medicare Advantage plans (but not Medigap policies).
- After age 65, withdrawing funds for non-medical purposes avoids the 20% penalty, although such withdrawals are considered taxable income. Some people have used their HSA nest egg to buy investment property.
- Funds can be transferred from your investing portion of your account (usually mutual funds or stocks) as needed to pay approved medical expenses.
- For those who are not working, you can still contribute to your HSA account. While these contributions are not pre-tax, they can be deducted on your income tax return.
What are the disadvantages of a health savings account?
It is important to consider the potential disadvantages of using a health savings account.
- Withdrawing funds for non-medical purposes before age 65 is considered taxable income and a 20% penalty is also imposed by the IRS.
- Some big box stores and other merchants do not accept HSA cards and you will need to get reimbursed by your HSA trustee.
- If you are declared as a dependent on someone else’s tax return, you are not eligible for an HSA.
- Expenses can be verified by the IRS, so you’ll need to keep receipts for all purchases.
- Interest rates on HSA accounts are low and some trustees charge monthly fees if your balance falls below a certain threshold.
- If you don’t stop contributing to your HSA six months before you apply for Social Security benefits, tax penalties may apply.
- Once a person turns 65 (Medicare eligibility age), additional contributions (including catch-up contributions) can no longer be made, even if they are still employed.
- Minimum balance requirements may apply before you can invest; investment options may be limited and investments are not insured.
What are some examples of eligible or approved medical expenses?
Thousands of items are eligible.
In addition to health plan co-payments, dental and orthodontic care, eyeglasses, contact lenses and prescriptions are included. Massages, yoga classes, and gym memberships are also eligible if you have a medical necessity letter from a physician prior to receiving the service.
Thanks to the CARES law, over-the-counter drugs and feminine hygiene products are now eligible expenses. The IRS announced on March 26, 2021 that face masks, hand sanitizer and disinfectant wipes in an attempt to prevent the spread of COVID-19 have been added as approved medical expenses to be paid or reimbursed through a HSA.
Here are some other things you can use HSA funds for:
- To reimburse you for the kilometers traveled to a doctor or medical establishment and to pay for accommodation if you receive medical treatment in another city requiring an overnight stay.
- Cobra and LTC (Long Term Care) after-tax premiums.
Here’s a bit of background on HSAs: HSAs were first used in 2004 and were based on rules governing IRAs because they were designed as a long-term savings vehicle in addition to covering medical costs.
According to 2018 statistics from the Employee Benefit Research Institute (EBRI), nearly three in 10 employees had access to HSAs and 71% of HSAs have been opened since 2015.
At the end of the line
Setting aside pre-tax dollars for current and future medical expenses may be right for you. As HSA funds renew themselves from year to year, allowing unspent funds to accumulate, they can add a high degree of peace of mind to your golden years when the cost of medical bills comes down to you. not covered by insurance could be a huge financial problem. If you find that you don’t need the extra funds for medical bills, you can always splurge on something you really want or leave it to the recipient of your choice.