If you’re like many people, you may be unfamiliar with health savings accounts (HSAs). As employers try to curb the costs of health care, they’re likely to offer HSAs to workers as a solution.
So, let’s get to know these special accounts and how they can help cut the cost of your medical expenses.
What is a health savings account (HSA)?
Health savings accounts were created by Congress in 2003 and became law in January 2004. Their purpose is to help you save and pay for future medical expenses on a tax-free basis. In other words, you never have to pay tax on contributions you make to an HSA, which substantially reduces medical costs.
What can you pay for using a health savings account (HSA)?
The money you save in an HSA can be used to pay for expenses that aren’t covered by your health insurance, like the deductible or co-payments (this is the portion of medical costs that you pay, as stated in your insurance policy). You can also spend HSA funds on other types of health costs, like trips to the dentist, prescription eyeglasses, hearing aids or anything that qualifies for the medical expenses tax deduction.
You can review the full list of allowable deductions in IRS Publication 502, Medical and Dental Expenses. If you spend HSA funds on non-qualified medical expenses, you’ll have to pay both income tax and a hefty 10 percent penalty on the amount.
Who can open a health savings account (HSA)?
If an HSA is so great, why doesn’t everyone have one? Well, here’s the catch: You can only contribute to an HSA when you have a certain kind of health insurance known as a high deductible health plan (HDHP).
So, in order to open up an HSA, you must be enrolled in a HDHP first. Additionally, you can’t be enrolled in Medicare or be claimed as a dependent on someone else’s tax return to qualify for a HDHP. But you qualify for an HSA no matter if you purchase a HDHP through work or on your own.
What is a high deductible health plan (HDHP)?
A high deductible health plan (HDHP) is exactly what it sounds like: a health insurance policy that comes with a high deductible compared to typical policies. A deductible is the amount you must pay before an insurance company pays your covered expenses.
For 2014, here are the requirements for a health policy to be considered a HDHP:
- The annual deductible must be at least $1,250 for an individual policy or $2,500 for a family policy.
- The annual cap for out-of-pocket expenses can’t exceed $6,350 for an individual policy or $12,700 for a family policy.
A HDHP can save money because the higher your deductible, the lower your monthly premiums will be. Depending on your health needs, this may be the ticket to saving money on health insurance.
How much can you contribute to a health savings account (HSA)?
The annual contribution you can make to an HSA for 2014 is up to $3,300 for an individual or $6,550 for a family policy. You have until the filing deadline (which is usually April 15) following the tax year to make contributions.
If you’re 55 or older by the end of the tax year, you can save an additional $1,000 no matter if you have an individual or family plan.
What happens if you don’t spend health savings account (HSA) funds?
The beauty of an HSA is that there’s no deadline to spend your contributions. So don’t confuse it with a flexible spending account (FSA), which does have an annual “use it or lose it” provision.
Unlike an FSA, your HSA balance rolls over from year to year. This feature allows you to accumulate savings for the long-term.
What happens if you cancel your high deductible health plan (HDHP)?
If you decide to cancel your HDHP, you can still spend your HSA money for qualified medical expenses on a tax-free basis indefinitely. However, you can’t contribute additional funds to an HSA if you ditch your HDHP.
The tax advantages of an HSA combined with lower premium payments of a HDHP can help reduce your medical expenses. Plus, you’ll have an attractive savings vehicle to put away money for future health care expenses that you’re likely to have during retirement.
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