Understanding Health Savings Accounts (HSAs)

Health savings accounts (HSAs) are a trending topic in the healthcare and employee benefits space. Consumers are definitely interested in learning more about them; what they are, how they work, and what their advantages are. In an environment where healthcare costs continue to rise, many employers are offering high deductible health plans (HDHPs) to their employees. This typically means a lower monthly premium, but you may pay more out-of-pocket medical expenses with a higher deductible. In this case, HSAs can be an efficient solution to help pay for medical expenses while also saving money.

Here are a few things to note about HSAs:

HSAs accompany HDHPs.  

The first thing that you should know about HSAs is that they must be coupled with a HDHP. A plan qualifies as a HDHP if it meets the minimum annual deductible and the maximum out-of-pocket expenses.

HSA deductibles and OOP max

For 2019, the minimum annual deductible will remain the same, while the annual out-of-pocket expenses (which include deductibles, copays and coinsurance) will increase from 2018 to 2019. Your HDHP must be your only health insurance plan. Also, you must not be eligible for Medicare or be claimed as a dependent on someone else’s tax return.

HSAs offer tax savings.

Think of an HSA as a tax-advantaged savings account. Your employer may offer an HSA option, or you can also open an account through a bank or other qualified financial institution. If you are eligible and decide that you want to contribute to an HSA, you can contribute monthly up to one-twelfth of the annual maximum for HSA contributions. Contribution limits are determined by the Internal Revenue Service (IRS) for each calendar year.

HSA Contribution 2019

HSAs offer consumers control over their spending decisions.

Anyone can contribute to your HSA including you, your employer, or a family member. However, the combined contributions cannot exceed the HSA maximum contribution limit. Contributions to your HSA are deducted when you file your income taxes. Check with your employer to see if they offer a Section 125 plan. This means that you are able to make your HSA contributions on a tax-free basis; your contributions will be taken out of your wages and no federal income tax or employment tax will be withheld.

An HSA is managed by the account holder. When using your HSA, you have great flexibility. You can use funds to pay for current or future medical expenses, save the funds for any unexpected events or future unemployment, to help cover expenses after retirement (before enrolling in Medicare) or any out-of-pocket expenses when covered by Medicare. HSA distributions are tax-free if they are a qualified medical expense. Qualified medical expenses are defined by the federal tax code in Section 213(d). You can use HSA funds for non-qualified medical expenses, but you will have to pay income tax on this withdrawal and pay a 20 percent additional tax.

HSA accounts are portable.

You can keep your account even if you change jobs, move to another state, become unemployed or change medical coverage. If you are no longer enrolled in a HDHP, you cannot make contributions to an HSA, but you can still use the money that you have saved. Also, funds remain in your HSA from year to year, unlike a Flexible Spending Account (FSA) which is “use it or lose it.”

HSAs can save you money.

HSAs can help you save in a few ways. First, funds can be used to pay for current and future medical expenses, and potentially offset high out-of-pocket costs. Also, if funds are not used they grow through accrual of tax-free interest or investment earnings. This helps with long-term retirement planning. Adults ages 55 and older can make additional contributions known as “catch-up payments” to their HSA. In addition, HSAs present an opportunity for long-term growth. If you own an HSA-eligible individual retirement account (IRA) or a Roth IRA, you can shift those funds to an HSA without facing any tax penalty. If you build your HSA balance starting at a young age by making consistent contributions and investing what you roll over to the next year, you can accumulate considerable savings.

To help determine if an HSA is the right option for you or for further clarification on how much you may save in taxes, contact Rose & Kiernan, Inc. here or by calling (800) 242-4433.

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