What are HSA Accounts?

Doctor holding piggy bankA Health Savings Account (HAS) is a mechanism for saving money that is specifically earmarked for paying one’s medical expenses.

These accounts work similarly to other savings plans in the sense that pre-tax contributions are made that grow tax-free, and tax-free distributions are eventually made that are spent for qualified medical expenses.

Their availability is limited to individuals who have what are referred to as high deductible health care medical insurance plans. Thus, HAS savings accounts are an integral part of one’s health insurance plan.

HAS accounts are receiving notoriety as an element of President Trump’s proposed new health care plan, as noted by this report:

A health savings account is a way to save money for health costs that go above and beyond insurance coverage. This can be a very useful way to cover copayments, deductibles, and other non-covered expenses. HSAs are used in conjunction with a high-deductible health plan (HDHP) where the HSA helps patients cover the large deductible when they need expensive care.

In an interview with the site Your Health Care Simplified, Brent Ulreich, the senior financial planner at Hefren-Tillotson Inc. in Pittsburgh, Penn. said this:

“One of the major benefits of the HSA is the tax-deferred growth and tax-free distributions if proceeds are used for qualified medical expenses. Even after you leave employment, funds left in your HSA can be used to pay for medical expenses throughout retirement.”

As reported in Market Watch, HSAs have long been favored by Republicans, in part because such plans are said to encourage smarter consumer behavior. Rather than almost all costs being covered by your insurer, you have those upfront costs to pay before the deductible kicks in. The thinking, at least in part, is that it will encourage consumers to shop around. (Though some studies suggest it encourages people to refrain from seeking care at all.)

There are many advantages to having a Health Savings Account, including, as noted by Investopedia:

  • Others can contribute to your HSA. Contributions can come from various sources, including you, your employer, a relative and anyone else who wants to add to your HSA.
    • Pre-tax contributions. Contributions made through payroll deposits (through your employer) are typically made with pre-tax dollars, which means they are not subject to federal income taxes. In most states, contributions are not subject to state income taxes either. Your employer can also make contributions on your behalf, and the contribution is not included in your gross income.
    • Tax-deductible contributions. Contributions made with after-tax dollars can be deducted from your gross income on your tax return, which means you may owe less tax at the end of the year.
    • Tax-free withdrawals. Withdrawals from your HSA are not subject to federal (or in most cases, state) income taxes if they are used for qualified medical expenses.
    • Earnings are tax-fee. Any interest or other earnings on the assets in the account are tax free.
    • Funds roll over. If you have money left in your HSA at the end of the year, it rolls over to the next year.
    • Portable. The money in your HSA remains available for future qualified medical expenses even if you change health insurance plans, change employers or retire. Funds left in your account continue to grow tax fee.
    • Convenient. Most HSAs issue a debit card, so you can pay for your prescription medication and other expenses right away. If you wait for a bill to come in the mail, you can call the billing center and make a payment over the phone using your debit card. And, you can use the card at an ATM to access cash.

HSAs also have a few disadvantages, including:

  • High deductible requirement. Even though you are paying less in premiums each month, it can be difficult – even with money in an HSA – to come up with the cash to meet a high deductible.
  • Unexpected healthcare costs. Your healthcare costs could exceed what you had planned for, and you may not have enough money saved in your HSA to cover expenses.
  • Pressure to save. You may be reluctant to seek healthcare when you need it because you don't want to use the money in your HSA account.
  • Taxes and penalties. If you withdraw funds for non-qualified expenses before you turn 65, you'll owe taxes on the money plus a 20% penalty. After age 65, you'll owe taxes but not the penalty.
  • Record-keeping. You have to keep your receipts to prove that withdrawals were used for qualified health expenses.

Hundreds of health expenses qualify for payment from an HSA. They are explained in detail in IRS Publication 502, Medical and Dental Expenses

In conclusion, when it comes to going the HSA route, it’s highly advisable to carefully consider your options. An option that satisfies the needs of one person may not necessarily be the right choice for another person.

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