In recent years, Health Savings Accounts have become a popular topic of discussion among those who are not only interested in health, but financial security as well. The benefits of this account are more than you might think.
With a Health Savings Account, a person can deposit money for medical expenses without having to pay federal income tax on it, and the funds can only be spent on qualified medical expenses. This allows low-income individuals to save money, without risking their federal tax liability.
A person can also use their tax-exempt HSA funds to purchase investment products, which can provide a more secure retirement plan.
What is an HSA?
A health savings account (HSA) is a tax-free bank account that you put money into to pay for medical expenses. HSAs work much like a 401(k) plan: Contributions are pre-tax, so the money grows tax-free until it is withdrawn.
Health savings accounts (HSAs) are tax-advantaged savings accounts available to individuals enrolled in a high-deductible health insurance plan. With an HSA, you can make pre-tax contributions to your account and use the money tax-free for qualified medical expenses.
Is HSA a measure to reduce health insurance cost?
For many years, low-deductible health insurance plans have been considered the norm in the United States. However, health insurance companies are now doling out high-deductible health insurance plans as a means of reducing healthcare costs.
These plans are the opposite of low-deductible health insurance plans in that they have high deductibles that you must meet before your insurance coverage begins to work.
High-deductible health insurance plans are for those who are willing to pay more for their medical coverage in exchange for affordable premiums. For smaller families where everyone is healthy, this may be a good insurance option.
What is a qualifying medical expense?
You can withdraw funds from your HSA to help cover qualified medical expenses that were not covered by insurance or reimbursed by a plan. These expenses might include doctors’ visits, prescription medications, dental work, vision care, and many others.
Health savings accounts have a few different requirements. The account needs to be opened with a qualified High Deductible Health Plan (HDHP). (We will see what is high deductible health plan a little later in the post.)
The plan must also have a deductible that is at least $1,350* for individual coverage and $2,700* for family coverage. High-deductible plans are often advantageous because they are more affordable than traditional plans. In fact, the average deductible on a high-deductible plan for a family is just $1,230*.
You can sign up for a HSA with any insurance company, and some employers even offer this option as a benefit.
I have health insurance, what is the use of Health Savings Accounts you ask? HSA’s are accounts that give you tax-free earnings, are not subject to income tax, and can be used for medical expenses.
Triple Tax Savings
Many people are unaware of how significant the HSA triple tax savings is. Before signing up for an HSA plan, it is imperative to know the benefits it offers. Your contributions are not taxed, interest earned is not taxed, and health care expenses are not taxed.
The IRS defines a HSA as an account that has tax-deductible contributions, tax-free interest or other investment income, and tax-free distributions for qualified medical expenses. The IRS also states that qualified medical expenses include doctor visits, prescriptions, dental care and other qualified expenses.
An HSA account is established between the individual and their health insurance company. The individual deposits a certain amount of money on a monthly basis. The money is then deposited into a fund that is managed by the individual and their chosen health insurance company.
How to Open an HSA?
To open an HSA, you will need to start by getting a Health Savings Account. Some people choose to open their HSA with their company where they work but others prefer to work with a non-profit such as Health Advantage.
Some people choose to open their HSA with a for-profit company as well but they may be unable to work-out a tax deduction through the company they work with. You should consult your tax professional before making any decisions on opening your HSA. The next step is to find out how much the monthly contribution will be for you and your dependents to be eligible for a tax deduction.
Helpful Hints for Opening an HSA
First, determine your eligibility to open an HSA. This means that if you are eligible, you should find your bank’s provider of HSAs. You will be asked to consult your annual 401k/403b statement and your 1040A form.
Consult your list of qualifying expenses to determine what is considered medical expense. Medical expenses include skincare, prescription medicines, and eye-wear. This information will tell you what you can use your HSA for. You will need to open an account with your chosen provider to open an HSA.
The focus of an HSA is to help people save money for future health care expenses. For example, saving up in a HSA can help to cover the costs of maternity care, a visit to the dentist, a wisdom tooth extraction, or even cancer treatment.
An HSA not only provides a safety net, it can also help to offset the costs for families who are struggling to be able to afford health care.
Now, let us see What is A High-Deductible Health Plan?
The implementation of a High-Deductible Health Plan (HDHP) is an important step when it comes to managing your health care costs. The HDHP is an umbrella term used to describe any insurance plan with an annual deductible of $1,350 or more for an individual or $2,700 or more for a family.
You’ll see this type of plan at the top of the charts when you shop for health insurance. High-deductible plans are often advantageous because they are more affordable than traditional plans.
How Does A HSA Work?
The HSA is funded by an employer, the employee, or a government agency. It is not an insurance plan, but it functions much like a health savings account.
HSAs offer benefits to people who are retired, unemployed, or self-employed. You can be enrolled in Medicare, Medicaid, or any other type of healthcare program, and still open an HSA account.
Some individuals may also be able to open an HSA account for their children.
HSAs combine the advantages of a traditional IRA with the benefits of an HMO. You can establish an HSA by setting up a traditional IRA or by opening a special account with an insurance company, bank, or HSA trustee.
The contributions to an HSA are deducted from your taxable income, and you only have to pay taxes when you withdraw money from the account for qualified health expenses.
You can contribute to an HSA until the end of the year in which you turn 65, and you can still contribute if you are unemployed.
Also, you can contribute to your HSA all year round, even after you spend the money.
How Much Can I Contribute to the HSA?
An individual can contribute a maximum of $3,400 ($6,800 if married filing jointly) in 2018, while a family can contribute $6,750 ($13,500 if married filing jointly). These contributions are adjusted annually for inflation. An individual can also deduct 100% of their contributions to their HSA up to their allowable contribution limit.
In 2021, the individual can contribute up to $3,600 per person, for a family $7,200. For Individuals who are disabled may be able to contribute more than $7,200 per person. A Catch-up Contribution (Age 55+) of $1,000 is allowed for both individuals and family.
As long as you maintain a high deductible plan, you can contribute as much as your annual deductible limit into your HSA.
One of the reasons I enjoy the HSA is because I can contribute as much as I want to this account. The limit for contributions per year is $3,600 but some employers might also match a certain amount. It’s great because it’s an amount I can probably afford and I won’t regret it when my employer matches it.
Do you know if the money in your health savings account (HSA) ever expires?
The answer is no. The funds in your HSA can continue to be used indefinitely or until you change your mind. If you are a Medicare beneficiary and enrolled in a Medicare Plan, you can use your HSA funds to pay Medicare premiums. Your HSA funds can also be used to pay for Medicare deductibles, coinsurance, or copayments.
There is no deadline for contributions to your HSA. And if you are enrolled in the DCAP, you will be able to make contributions to your HSA and designate the contributions for future services.
However, it’s important to know that you must make contributions before the end of the year. If you make a contribution after December 31st, then that contribution will be for the following year.
If the holder of the account dies, the HSA becomes an IRA beneficiary designation. Before the owner dies, HSAs can be rolled over to another HSA account or converted to a different type of IRA.
HSAs can also be used to pay for long-term care, dental care and health care expenses for premature babies. HSAs are a way in which you can save for the future in an easy and tax-advantaged manner.
Health Savings Account – Advantages
An HSA is a great way to save money because you put in pre-tax money to cover your deductible, coinsurance, and copayments. You can also decide where you want to put the money into the account and there are no restrictions on who can contribute to it – your employer may match your contributions or even give the contributions to you.
- Being able to make deposits to the account tax free
- Contributions to the account are tax-deductible for income and payroll taxes
- Withdrawals from the account for qualified medical expenses are tax-free
If you have a high deductible health insurance policy, opening an HSA is a prudent financial move you should seriously consider.
You are in control of the funds in the account, meaning that you decide how the money is spent. Unlike many other medical plans, there are no deductibles or copays when using the account. You can also qualify for a lower deductible if you invest more money into the account.
You can withdraw the money from the account at any time without paying taxes.
If you are struggling to pay your medical bills, then an HSA is a great way for you to save for medical bills and also get some of the money back. This is because an HSA is considered as a tax-deductible medical expense. If you are working with a healthcare provider to save on your medical costs, an HSA is a good way for you to build on the savings and not have to worry about taxes.
Health Savings Account – Disadvantages
Unlike a traditional FSA, the HSA is both protected and not taxed, making it a more attractive account. However, once funds are withdrawn for use in other accounts, they are subject to both state and federal income tax.
Individuals with a high deductible health plan may not be able to maximize their savings into their HSA. The IRS limits the maximum contribution to $3,600 for individuals.
You need a high-deductible health plan, your employer may make contributions to a FSA instead of an HSA, and you cannot withdraw funds from an HSA without penalty.
An individual must be healthy enough to make contributions to the account, there are restrictions on the types of qualified expenses.
Healthcare costs can show up without warning, and it can be difficult to predict how you’ll be spending your savings account in the future. Keep a careful record of what you pay in healthcare fees.
Depending on the insurance company, you may have to pay account fees per transaction or maintenance fees.
How To Set Up An HSA
The Health Savings Account (HSA) is a great tool to help you save for major medical decisions, such as a trip abroad or life-saving surgery.
Step 1: Sign up to the FSSA program at a bank or credit union that offers one online.
Step 2: Contact your bank. Find out what free HSA contributions are eligible.
Step 3: Log into your account online (if it’s a free HSA account) or call customer service.
Step 4: Enter your social security number and an HSA number. If you have a free account, you’ll need your SSN.
Tax Planning and Preparation
First, a word of caution – If you know that you have an HSA, you don’t have to do anything in advance other than enrolling your tax-advantaged savings in the HSA. Don’t fret about this – The IRS takes care of all this. The only thing you can do now to establish your maximum tax deduction on your federal taxes is to begin filing your return as you normally would – as you normally would for your self-administered tax preparer for the first time.
The key thing to remember is to make it absolutely clear to your tax preparer that you’re saving toward your HSA! It can be difficult to get your preparer to understand this. When you tell her or him that you are saving for your future self in an HSA, your preparer will find a way to help you. And when you make this effort, we guarantee you’ll get double the tax break!
If you are not enrolled in a tax preparer who specializes in HSA’s you can file your return as you normally would prepare it yourself, in which case you can still deduct the entire cost of your HSA contribution.
Understand Your Investment Needs And Options
As a retiree, you might hear this one more than most: ‘Hey, I remember you got the HSA, so I’m glad you’re keeping it, but I thought you had to keep all of your money in a high-deductible savings account.’
That’s certainly the situation most new HSA owners are in, and that’s exactly why it’s imperative to understand the pros and cons of the high-deductible plan first. It’s also important to remember not all retirement accounts are created equal, and how you setup the HSA affects its effectiveness in achieving your goals.
When setting up an HSA, it’s important to understand which programs have the most tax benefits and, on the flip side, which option has the best track record to meet your financial objectives and achieve your ultimate goals.
What is the High-Deductible Saver Account and does it qualify as a Health Savings Account?
The High Deductible Saver Account is a personal savings account that is designed to help with health care costs, paying for copays or deductibles. The HSA has different requirements than the high deductible account but the high deductible account is considered a type of HSA.
With an HSA account, you can contribute up to $3,600 for a single person and $7,200 for a family. It is also triple tax advantaged, which includes the contributions, earnings and distributions. The High Deductible Saver Account, as a health savings account, does qualify as one. They both are used to help pay for health care costs.
In order to qualify as an HSA-qualified account, the high deductible saver account must meet the following requirements: HDSA funds may only be spent on qualified medical expenses. HDSA funds may not be used for non-medical expenses or health insurance.
Premium payments and other out-of-pocket expenses in an HDSA are not tax deductible. HDSA contributions are not tax deductible. HDSA earnings accumulate on a tax deferred basis. With all of these restrictions in place, the high deductible saver account is not an HSA-qualified account.
Difference between a Health Savings Account and a High-Deductible Saver Account
The two accounts both have tax advantages but they are structured differently. A Health Savings Account is created with annual deductible. A High-Deductible Saver Account doesn’t have a deductible.
The money in a Health Savings Account can be used to pay for eligible medical expenses. You can withdraw money from a Health Savings Account at any time without penalty for certain qualified expenses.
Alternatives to Using a Health Savings Account
In today’s world, there are many things that can eat away at a person’s finances. The cost of living has skyrocketed, medical expenses are also on the rise. But many people’s salaries have not increased to match.
Trying to do a good thing by saving money becomes harder when there are many other expenses that need to be paid. Although many people try to save money for the future, there are certain provisions that are designed for those who need a little bit more help financially.
As we have seen so far, Individuals with a qualifying high deductible health plan can contribute pre-tax money to an HSA, similar to a 401(k). Once they are 65, individuals can use the funds in the HSA as they would any other retirement account, such as for a vacation or home improvements.
If you are just looking to invest your money tax-free there are many other options like, Traditional IRA or a Roth IRA or Inherited.
A Traditional IRA allows you to deduct your contributions from your taxable income.
A Roth IRA is the opposite of this since you don’t get a tax deduction for contributions. You can withdraw the contributions at any time, but the earnings may have to be taxed.
Finally, the Inherited IRA allows you to avoid taxation on earnings if the account is inheriting from a family member.
Since IRAs are self-directed investments, they have the potential to be riskier than other types of investments.
The rules allow most investments in IRAs – including stocks, bonds, mutual funds, CDs, gold and silver bullion, REITs, and so on.
Each IRA is a different entity that provides a means to invest in securities and other property.
But if you are looking for Health Specific account, then you can consider, HRA, FSA or HRPs.
Other Health Plans to Consider
Health Reimbursement Accounts (HRAs)
Health Reimbursement Accounts are a type of a health care plan that employers offer employees to help cover medical expenses. These plans are advantageous because employers pay all or part of the cost of healthcare for employees. Employers can also offer this plan in lieu of other benefits, like salaries, which make it a more affordable option.
Employees are eligible for reimbursements for care for themselves, their spouses, and their children. This type of plan is not without its drawback though. One such drawback is that employer contributions are not tax-deductible. Another potential drawback is that employers are not required to offer these plans to employees, making this route less popular than others.
Flexible Spending Account
Many of us have felt the squeeze of budgets in the recent years. It can be tough to pay for the annual family vacation, the ongoing needs for new clothes and school uniforms, and the numerous visit to the doctor’s office. It’s not always easy to balance the needs of today with the demands of tomorrow.
One way to help is with a Flexible Spending Account. Flexible Spending Accounts help you save money on certain “flexible” expenses. You can set aside money to cover a large purchase, like a car, or to help pay for ongoing needs that you know you’ll have the next year.
The FSA can also be used to pay for insurance premiums, copays, coinsurance, deductibles, and expenses not covered by a health plan (such as eyeglasses, hearing aids, prescriptions, dental care, physical therapy).
This is different from a Health Savings Account (HSA), which is a tax-advantaged savings account for the payment of medical expenses in retirement. The FSA is funded by the employee, whereas the HSA is funded by the employer.
Healthcare Reimbursement Plans
A Healthcare Reimbursement plan is a way in which someone can be reimbursed for money they spent on behalf of a patient. These may be non-medical costs such as mileage or they may be medical costs like medical equipment. The reimbursement of these costs is done by the patient’s insurer or by a third-party company that the insurer hires to handle the reimbursements.
The process of choosing a healthcare reimbursement plan is a difficult one. One of the most important steps to take when choosing a healthcare reimbursement plan is to make sure you understand your healthcare needs. This includes things such as your current life situation (single, married, new parents) and whether you have any major medical conditions.
A Healthcare Reimbursement Plan works much like any other contributory plan, it allows employers to put money aside on behalf of their employees for healthcare expenses. Those contributions can be as low as $25 per year and do not have any limit on the maximum annual contribution.
Employers decide how much employees can contribute to their plan and how often. Employees who enroll in an HRA cannot enroll in their company’s insurance plan. Some employers may not offer HRA plans and instead offer only an HSA plan, which is not as generous as an HRA plan.
For any additional information visit: HealthCare.Gov