How to Manage a Health Savings Account Hsa

HMOs, PPOs, FSAs. Medical jargon has been around a long time. And now one of the latest acronyms – HSAs – has cropped up almost everywhere. But exactly what is an HSA?

HSA stands for “health savings account” and is a medical savings account combined with a high-deductible medical insurance plan. It is basically saving money for future healthcare expenses. An individual makes tax-deductible contributions to the plan within specified limits. The money earns interest and grows as a tax-deferred account. Money from an HSA is used to pay for qualified medical expenses such as doctor visits, prescription drugs, and outpatient testing. They are designed to give an individual more control over how their healthcare dollars are spent and to take advantage of lower premium insurance plans, resulting in increased savings to the individual.

An HSA is sometimes compared to an IRA but it does not replace an IRA! It is a medical spending plan and not a retirement or savings plan. The HSA works in conjunction with a high-deductible health plan – which is required if you plan to enroll in the HSA. This high-deductible health plan provides additional protection should you need it for higher cost healthcare including hospitalization, surgery, or other healthcare needs.

Although an HSA is not typically designed as a retirement plan, it can be used as a supplemental strategy for this purpose. Interest earnings accumulate tax-deferred in your HSA and if the money is used to pay for qualified medical expenses, it continues to be tax-free. Eligible medical expenses are defined as “those expenses paid for care as described in Section 213(d) of the Internal Revenue Code.” Additionally, the IRS has allowed some over-the-counter drugs to qualify as eligible medical expenses.

And unlike a Flexible Spending Account, unused money in your HSA isn’t forfeited at the end of the year so it continues to grow as tax-deferred income. Money can be withdrawn after you reach the age of 65 for non-medical expenses but you still have to pay income taxes on the money used for this purpose.

What are the benefits of HSAs? Let’s take a look at some.

1. It is a tax-deferred account which is a definite tax advantage and interest earned is also tax-free.
2. Although total contributions are limited annually (but does NOT impact your total IRA limits), your employer may also make contributions to the account for you.
3. Money is set aside for planned, unexpected and unplanned medical situations and is in this tax-deferred account when you use it, it is tax-free!
4. You don’t forfeit money at the end of the year it’s yours to keep and rolls over annually.
5. Once you meet your deductibles with medical expenses, the health plan pays the rest of your covered expenses.
6. Just like health insurance coverage, your HSA is portable and goes with you if you leave your employer. You can continue to use the funds for medical expenses even without a high deductible plan.
7. After you reach age 65, you can use your HSA funds for non-medical expenses. You only have to pay income taxes on the money and not the 10% penalty.

You are eligible for an HSA if you meet the following criteria:

1. You must be covered by a high deductible insurance plan
2. You cannot be covered by other health insurance
3. You must not be enrolled in Medicare
4. You cannot be a dependent on another person’s plan

It is important to remember that non-medical expenses should not be paid out of your HSA or they will be taxed and penalties may be incurred by as much as 10%. If you are 65 or older when you withdraw the funds for non-medical reasons, you are still subject to income taxes but not required to pay the 10% penalty for withdrawal.

If you are considering an HSA, you should evaluate all of the requirements and discuss it with your financial advisor. An HSA is just one component of your financial planning strategy and it should be carefully evaluated against all other options. The plan allows you to take advantage of tax-deferred savings and lower cost health insurance premiums while taking more control of your personal healthcare expenditures.

Once you make a decision to invest in an HSA you will begin to reap the benefits immediately!