Health Savings Accounts

Are you qualified for a Health Savings Account?

A Health Savings Account (HSA) is a tax-favored account used in conjunction with an HSA-compatible health plan. The HSA allows you to contribute funds on a pre-tax or tax-deductible basis, which you may use to pay for eligible medical expenses.

It’s easy to determine if you are qualified for a Health Savings Account (HSA).

You are qualified for an HSA if:
  • You are covered by a single or family high-deductible health plan (HDHP).
  • You are not covered by any other health plan that provides any of the same benefits as the HDHP.
  • You are not enrolled in Medicare
  • You cannot be claimed as a dependent on another person’s tax return.
  • To enroll in an HSA, you must have a primary U.S. residence as well as a valid Social Security Number.

    Changing How We Buy Health Care

    HSAs are designed to motivate better health care purchasing decisions. The underlying idea is that people make smarter financial choices when they are spending their own funds — with the extra motivation of the money otherwise growing in a tax-advantaged account.

    To make better health care purchasing decisions you need better preliminary information about health care expenses. This issue of “cost transparency” is a key element of the health insurance industry’s Consumer Directed Health Care (CDHC) movement. With increasing online access to hospital/physician fee data, more useful information is becoming available, but health care cost transparency is still in its early stages

    Discover the Tax Advantages of an HSA

    There are plenty of advantages to a Health Savings Account. Funds rollover each year, there’s no “use it or lose it’ and the account is FDIC insured. But the biggest advantage is the tax savings.

    Contribution Tax Benefits

    If your employer offers a payroll deduction through a Section 125 Cafeteria Plan, you can make contributions to your HSA on a pre-tax basis. The deduction is removed from your paycheck prior to taxes being applied and deposited into your HSA. Ask your employer if they facilitate pre-tax deductions.

    Contributions can also be made post-tax as an “above-the-line” deduction. This means you can reduce your taxable income by the amount you contribute to your HSA. HSA Bank will send you all the documents you need to complete your HSA-related tax filing.

    Distribution Tax Benefits

    Eligible medical expenses such as prescriptions or dental and vision care can be purchased tax-free when you use your HSA. You can also pay out-of-pocket for eligible medical expenses and then reimburse yourself from your HSA.

    Earnings Tax Benefits

    The interest on HSA funds grows on a tax-deferred basis. And, unlike most savings accounts, interest earned on an HSA is not considered taxable income when the funds are used for eligible medical expenses.

    When do you Pay Taxes on your HSA?

    The only time you may pay taxes or penalties on your HSA funds is if you make a non-eligible purchase, or if you contribute more than the yearly maximum contribution limit. However, both misuses can be corrected free of tax penalties by April 15th of the following calendar year.

    Eligible Medical Expenses

    An eligible medical expense is an expense that pays for healthcare services, equipment or medications as described in IRS Publication 502.

    IMPORTANT: In 2011, your Health Savings Account (HSA) may no longer be used for over-the-counter drugs, unless they are prescribed by your doctor.

    In general, your HSA can be used for:
  • Expenses applied to your health plan deductible
  • Dental care services
  • Vision care services
  • Prescription services
  • Over-the-counter medications prescribed by your doctor
  • Certain medical equipment

    Current HSA Contribution Limits

    Since the HSA is a tax advantaged account it is subject to contribution limits similar to Individual Retirement Accounts. The money you contribute to your HSA through your employer is not subject to federal tax at the time of deposit (Pre-Tax Dollars).  If you are self-employed the dollars contributed are an “above the line” deduction on your taxes.

    Each year the HSA Contribution Limits are revised (or remain unchanged) based on the inflation rate of the previous year.  This year the HSA Contribution Limits were raised about 1.63% based on the rise of the Consumer Price Index (CPI) in the previous year.  This means that the contribution limit for an individual increased $50 to $3,100 and the limit for families increased $100 to $6,250.

    2014 – $3,300 Individual $6,500 Family
    2013 – $3,250 Individual $6,450 Family

    If you are age 55+ and enrolled in an HSA-compatible health, you can make additional annual contributions of up to $1000. If your spouse is also 55 or older, you can make total additional family HSA contribution of up to $2000.

    HSA Tradeoffs and Advantages

    For the majority of consumers, HSAs produce a net financial gain. But there is a tradeoff: You will likely have less generous health insurance benefits.

    With an HSA you will likely have a higher major medical deductible and you will not enjoy office visit and prescription co-pay benefits typical of PPO and HMO plans. Your potential out-of-pocket health care expenses may increase.

    However, consider these HSA advantages:
  • Reduced health insurance premium
  • Reduced rate of increase in health insurance premium
  • Taxable income reduced by HSA deposits
  • Out-of-pocket health care expenses paid with pre-tax funds
  • Enhanced preventive care benefits
  • A new source of long-term savings
  • The higher your HSA-compatible plan deductible, the lower your health insurance premium.
    In 2012 you can get a HSA annual deductible as low as $1200/single or $2400/family, but the most popular choices are HSA-compatible plans near the maximum annual HSA out-of-pocket (deductibles and copayments but not premiums) limits. In 2012 these amounts are $6050/single and $12,100/family. They will increase in 2013.

    How High or Low of a Deductible Should I Take?

    As your HSA balance grows, you may be inclined to purchase a higher deductible and further reduce your health insurance premium. Many of our clients purchase HSA deductibles in the vicinity of $5000/single and $10,000/family.

    Tax Year 2013 Tax Year 2014
    Minimum Deductible
    – Individual
    – Family
    Maximum Out-of-Pocket*
    – Individual
    – Family
    * also includes deductible, copays and other out-of-pocket expenses

    Retirement Savings vs Current Expenditures

    You can treat your HSA as a pure retirement account, like an IRA or a 401k. You can make HSA deposits to age 65, never make a withdrawal and generate tax-deferred investment income to be disbursed in your retirement years.

    However, a more financially sensible approach is to use some HSA funds for current health care expenses. It is a matter of paying bills with pre-tax income, as opposed to paying with after-tax income.

    Use your HSA to save, but spend when appropriate. For most people the HSA functions both as a tax-deferred retirement account AND as a tax-advantaged health care funding tool.

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