This is the time of year when many employees are or soon will be making benefit elections for the next calendar year. One potential resource that has been gaining in recent popularity is the Health Savings Account (HSA).
HSAs are not limited to employees through a group benefit program, though, as many individuals who obtain their own health insurance coverage can also utilize them.
Health savings accounts are a savings-type account to which individuals/employers contribute a sum of money, which can then be used to pay for needed first-dollar health-related expenses. Examples include doctor, prescription, dental or vision co-payments or other expenses which fall below any applicable deductible levels.
HSA advantages include a dollar for dollar reduction in taxable income for amounts contributed, regardless of income levels; potential tax-deferred growth of contributed dollars; and tax-free withdrawals when used to pay for eligible medical expenses. Plus, there’s no specific timeframe during which contributions must be used or otherwise forfeited, unlike some flexible savings accounts. Contributions can remain in the HSA account indefinitely, with balances growing until the funds may be needed in paying for eligible medical expenses in the future.
Another significant advantage is that contributions can be made to HSAs without affecting eligibility for continued contributions to retirement accounts. In addition, accounts are portable, so you can take any balances with you if you change jobs or retire.
HSA accounts must be used in combination with a high-deductible health insurance policy, whether purchased on an individual basis or through an employer-sponsored plan. However the eligible health insurance plans must meet specific criteria. Individual health insurance coverage must have a minimum $1250 annual deductible, with a maximum annual out-of-pocket expense threshold of $6350 (2014 criteria); family health plans must have a minimum $2500 annual deductible, with a maximum annual out-of-pocket expense threshold of $12,700.
Individuals with self-only coverage may contribute a maximum of $3300 to the accounts (2014 criteria), while those with family coverage may contribute a maximum of $6550 at present annually. In addition, an annual catch-up provision applies for those individuals who are age 55 and older; these folks may contribute an additional $1000 annually. All amounts are inflation indexed and may change annually.
Accounts can be established through a wide range of qualified HSA trustees, such as a bank, a third party HSA specialist or through an employer-recommended provider.
These HSA accounts can be particularly beneficial when monies contributed can remain in the accounts for several years or longer. Imagine how helpful these balances can be if an individual faces a serious illness or following one’s retirement, when amounts spent on health-related expenses typically increase.
While these accounts offer many advantages, note they also have specific requirements. Examples include: individuals who are enrolled in Medicare cannot contribute to a HSA nor can individuals who can be claimed as a dependent on someone else’s federal tax return. In addition, penalties may apply for improper use. These are only a few examples of specific applicable requirements. So discuss the potential use of these accounts carefully with your financial or tax adviser to make sure you fully comply with all applicable provisions.
In summary, who doesn’t like receiving an additional tax benefit, while at the same time setting aside dollars to use in paying for future health expenses? Contributing to a Health Savings Account may indeed be a right move for you!