One interesting component of the new health care landscape that’s developed over the past decade is the level of choice individuals now have. Rather than simply take the comprehensive coverage insurance provided by our employers, as we would have done in years past, we can now choose from literally dozens of options.
But it might not always feel like having so many choices is a good thing; in fact, sometimes too many choices can feel a little overwhelming. One of these choices – the Health Savings Account – is sufficiently unique that it bears a closer look by many individuals. In short, a Health Savings Account is a tax-advantaged savings account that lets you save pre-tax dollars which you can then use to pay your qualified medical expenses.
Here is some information and advice you should consider when deciding to fund a Health Savings Account.
Tax-Deductible Contributions. Contributions to an HSA are generally exempt from federal income tax, provided that the HSA owner is covered by a particular type of health insurance plan (discussed below). The contribution limit for 2011 is $3,050 (which can be made up until the filing deadline for your 2011 return) and the contribution limit for 2012 is $3,100. If the contributor is age 55 or older, then they can also contribute an additional $1,000 per year.
A HDHP is Required. To be eligible for an HSA, you must be enrolled in a high deductible health plan” (or “HDHP”). An HDHP will provide you with fairly traditional medical coverage, and will be similar to other health insurance plans you may already be familiar with, but subject to a very high deductible. Instead of having an annual deductible of several hundred dollars, an HDHP generally has a deductible of $2,500 or $5,000 or even $10,000 per year.
Qualified Medical Expenses. Funds in your HSA may be withdrawn to pay for “qualified medical expenses,” and those withdrawals are not subject to income tax. Qualified medical expenses are generally defined by the IRS to be those expenses that you could otherwise itemize on your tax return. With a few exceptions, any withdrawals that are made for things other than qualified medical expenses will be subject to taxation plus a 20% penalty.
Unused Funds Roll Over. Unlike some tax advantaged savings vehicles (most notably, the Flexible Spending Account), any funds that are not used in a given year will roll over into the next year. In other words, there is no “use it or lose it” burden with an HSA. This allows the funds in the account to grow tax-free.
Find a Suitable HSA Custodian. Many banks and credit unions include Health Savings Accounts as part of their product offerings. These accounts will usually include checkbook access to your funds, and many also offer a debit card that you can use to pay for your qualified medical expenses.
An HSA isn’t right for everyone. If you have or are likely to have a condition that requires frequent medical attention, or if you have children, then an HSA might not be a good fit for your needs because of the high deductible with the required HDHP. But if you’re relatively healthy and have no children, then give the HSA a look.
One interesting component of the new health care landscape that’s developed over the past decade is the level of choice individuals now have. Rather than simply take the comprehensive coverage insurance provided by our employers, as we would have done in years past, we can now choose from literally dozens of options.