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What You Need to Know About Health Savings Accounts

What You Need to Know About Health Savings Accounts

Fidelity Investments recently announced its largest annual increase in Health Savings Accounts. In 2011, its HSA customer base jumped 61 percent to 119,000 from 74,000 at the end of 2010. As of February of this year, Fidelity administered HSA assets of $327 million, up 43 percent from $229 million one year prior.

Employers like HSAs because they help control escalating costs and employees like them because of their long-term savings potential and tax advantages. Since being enacted in 2003, as part of a Medicare reform law, more than 6.8 million health savings accounts have been established, collectively holding in excess of $12.4 billion, according to research conducted by Devenir, an investment firm that specializes in providing investment options for HSAs.

If you've heard about HSAs, but haven't really taken a good look at them, maybe it's time to see what all the buzz is about.

What can a HSA do for you?

First off, an HSA is a tax-advantaged savings account designed to be used only in conjunction with a High Dollar Deductible Plan (HDHP) based on guidelines set by the IRS. This year, individuals can contribute $3,100 and families $6,250.

What's good about them? They have a triple tax advantage. “You get a pre-tax or tax deductible contribution going into the account, tax-deferred growth of the earnings and income tax free when spent on a qualified Section 213(d) expense (see IRS Pub. 502) for a full list of expenses that are HSA eligible,” says Paul Ashley, an advisor with FirstPerson, an employee benefits consulting firm.

There is no use it or lose it rule with the money in the account like you see on a Flexible Spending Account, says Renee Guariglia, executive vice president for Falcone Associates, which specializes in employee benefits.

Then too, of no small consequence, a high deductible health insurance plan paired with a HSA, often costs much less in monthly premiums compared to traditional health insurance. You can use your HSA to pay for co-payments, co-insurance and qualifying medical expenses not covered by your health plan, for example, explains Carrie McLean, consumer specialist with eHealthInsurance.com. Without a tax penalty, you may not use HSA funds to pay for monthly health insurance premiums or anything other than qualifying medical expenses, she adds. Money in a HSA cannot be used for over the counter medications, unless you have a prescription from your provider, says Guariglia.

Know too, that if you withdraw funds from your HSA for non-qualified medical expenses, you need to report that on your tax return and pay taxes on it. If you are younger than age 65, you will also pay a 20 percent penalty, says Bill Ware, vice president of U.S. Bank’s Healthcare Payment Solutions.

Is a HSA Right For You?

For all the good stuff about HSAs, they aren't for everybody. “They tend to come with higher-than-average deductibles,” says McLean. Average annual deductibles for HSA-eligible plans was $3,567 for individuals and $5,685 for families (non-HSA deductibles for comparison, were $2,810 for individuals and $3,398 for families), according to McLean. “Make sure you can afford the deductible in a pinch if necessary,” she adds.

HSAs are best for individuals and families who historically incur medical expenses below the deductible chosen, says Steven Spiro, a chartered life underwriter with The Excelsior Group, an independent insurance agency. “The savings in premium should more than cover their expenses. And if they've gambled incorrectly, at least the family's maximum exposure is capped.”

Generally, HSAs work for those who rarely visit the doctor or for those whose employers help fund the account, says McLean.

Know too, that you need to keep all receipts, Explanation of Benefit (EOB) statements from your insurance carrier and bank records in the event of an audit, says Guariglia.

Make the most of your HSA

To maximize the value of an HSA over time, limit utilization of medical care when appropriate and avoid meeting your deductible ever year, if possible, says McLean.

Ask your employer to chip in. Even if your employer doesn't fully fund HSA, they may be willing to contribute toward your HSA as a component of your total compensation package. You never know until you ask.

If you're over 55, you may qualify to make an additional $1,000 contribution toward your HSA for the 2012 tax year. Talk to your tax professional.

Be sure to deduct your contributions up to the federally prescribed limits. If you don't reach those limits during 2012, one of the nice things about HSA contributions is that they can be made in the first part of 2013 (prior to tax day) and applied to qualified medical costs in 2012, points out McLean.

Simply put, says Ashley about HSAs, “Most people come out ahead.”

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nothlit   |     |   Comment #1
Another thing to keep in mind is that your HSA contributions are also FICA (Social Security and Medicare) tax-exempt, but only if made as a payroll deduction by your employer. That's an additional 5.65% tax benefit (7.65% once the current Social Security tax cut expires). So while you can make after-tax contributions to your HSA and deduct them from your federal and (most) state income taxes, the only way to gain the FICA tax benefit is to make your contributions by payroll deduction.

I joined an HDHP/HSA plan with Aetna through my employer this year for the first time. For me, it's definitely worthwhile: my premiums for the year will total just $960, my deductible is $1500, and my maximum annual out-of-pocket limit is $3500, so even if I do have an unexpected medical issue it won't bankrupt me. Also, my employer contributes $600 to my HSA.

Before switching, I went back and ran the numbers for the last 3 years under my HMO plan and in every case I would have come out ahead under the HDHP/HSA plan. It might not make sense for everyone, but it sure makes sense for me right now. Plus I like the fact that if I don't spend all of the money in my HSA, I can withdraw it penalty free at age 65, just paying regular income tax on it at that time, which makes it like a traditional IRA.
jshannon   |     |   Comment #2
My HDHP premium with Bluecross/Blueshield is about $130/month. My workplace group policy would cost me around $40/month.