Maybe it’s not rocket science, but it might as well be. Let’s face it, health insurance can be confusing, complicated and down right infuriating, but we all need it. With so much up in the air right now about the direction the U.S. healthcare system will take, Well-Being thought it would be enlightening for us to take a look at some tools that could help consumers navigate the turbulent waters of health insurance now and in the future – the first being Health Savings Accounts or HSAs.
Well-Being turned to the Mississippi Insurance Department and Commissioner Mike Chaney, for help defining Health Savings Accounts and understanding the benefits.
What are HSAs? HSAs are savings accounts that allow you to set aside money on a pre-tax basis to pay for qualified medical expenses. They are available only to people who have a High Deductible Health Plan (HDHP), which means a plan with a minimum annual deductible of $1,300 and a maximum annual deductible and out-of-pocket expenses of $6,550 for an individual. For a family, the HDHP must have a minimum annual deductible of $2,600 and a maximum of $13,100 deductible and out-of-pocket expenses.
HSAs are designed to give health insurance consumers a tax-free way to set aside money to pay for medical expenses before their deductible is met, and also to cover healthcare costs of things like dental, vision and other health services not covered by your insurance. And, if you don’t use all of your HSA savings during the year, they roll over year to year, earning interest. It also is a way for consumers to have more control and take more responsibility in their health care purchases.
The most significant difference between Health Savings Accounts and employer-based Flexible Savings Accounts is that with FSAs you must “use it or lose it.” Money not used by the end of the year (or by March 15th of the following year if the employer offers a grace period) is forfeited unless employers allow enrollees to carry over a predetermined amount into the next calendar year.
Who is eligible for an HSA?
What are the tax and savings benefits of HSAs? The contributions made to an HSA provide a tax credit of up to $5,000 depending on whether the account holder is insured as an individual or family. You can contribute as much as you want to your HSA, but only contributions up to the maximum limit will be deductible from your gross income at tax time. As an individual you can receive a maximum tax credit of $3,400. If you contribute $6,750 as a family you can receive a tax credit of $5,000.
Put simply, the money contributed to the HSA is tax deductible, just like contributions to an IRA. The money withdrawn to pay a qualified medical expense comes tax-free. And the money in your health savings account grows without incurring taxes for the life of the account.
Are there any penalties for withdrawing money from an HSA? As long as the money withdrawn from the Health Savings Account is spent on qualified medical expenses, it is not taxed upon withdrawal. However, if the money is used for nonmedical purposes, the amount is subject to income tax and an additional 20 percent tax, according to IRS rules.
Unspent funds can remain in a HSA from year to year and be converted to individual retirement accounts once you reach retirement age. Savings can be used tax-free preretirement for qualified medical expenses for yourself, spouse or dependents, even if they are not covered under the high-deductible plan. Otherwise savings are tax-deferred until withdrawal. At 65 years old, you will avoid a 20 percent penalty even if not used for medical expenses. The increased flexibility over IRAs, 401(k)s and other retirement savings accounts shows why some savers may be shifting their contributions from traditional retirement vehicles.
What does the future hold for HSAs? We don’t yet know what the final healthcare bill now before Congress will entail, but we do know that the Republican plan, called the American Health Care Act, that was passed in the House of Representatives this spring would increase the contribution limits to $6,500 for individuals and $13,100 for families beginning next year, and make HSA rules more flexible. Before any healthcare legislation becomes final it has to be passed by the Senate and then will go back to the House and finally to the President’s desk for signing. (Note: At press time for this issue the Senate had not yet voted on its proposed bill.)
In the meantime, Health Savings Accounts are a great option, and a tool to seriously consider, for folks with high deductibles, to reap some excellent tax benefits, while putting aside savings to go toward out-of-pocket medical costs now, and building a nest egg for the future.