Health Savings Accounts
Health Savings Accounts (HSA) were approved by Congress in 2003, became law in 2004, and have grown in popularity over the last few years. HSAs are only available if you are covered by an HSA-qualified high-deductible health plan, but they are very tax-efficient if available and appropriate for you.
As open enrollment is approaching for many, you will need to choose your benefits for the next year. Most people get health insurance through their employer, but if you don’t, you will need to shop on your state’s health care marketplace.
Determining which plan is right for you or your family is complicated and you need to understand the alphabet soup (e.g. PPO, HMO, and HSA) and a few key health insurance terms (e.g. deductible, copayment, and coinsurance). It is important to weigh the pros and cons of each option available to you to allow you to make the best decision.
Below are some of the benefits of using an HSA:
- Lower monthly premiums than traditional health insurance plans.
- Contributions to your HSA as a salary reduction are exempt from all federal taxes, including Social Security and Medicare!
- No income thresholds for eligibility.
- You own the HSA and all of the contributions, even if you change employers or health plans in the future.
- You are able to invest your HSA assets and the growth of the account is tax-deferred.
- Distributions for qualified medical expenses are tax-free.
- Qualified medical expenses include Medicare premiums.
Health Savings Accounts are unique in that they are the only investment that allows pre-tax contributions, tax-deferred investment growth, and tax-free distributions.
With the potential for significant tax savings, relatively low monthly premiums, and no income thresholds, why wouldn’t everyone utilize an HSA if available to them? For individuals or families that expect high health care costs, the HSA is likely not the best option.
High-deductible health plans require the participant to pay all medical expenses until the deductible is met for the year. This can present a serious cash flow issue if you don’t have cash available to cover the policy’s deductible (maximum can be $6,650 for an individual and $13,300 for a family in 2018). Additionally, if your HSA distribution is not for qualified medical expenses, the amount withdrawn is subject to ordinary income tax, plus a 20% penalty!
Choosing the best health insurance plan for you and your family requires a thorough analysis of the available options, cash flows, taxes, and expected health care costs. A financial advisor with the knowledge to help you maximize your employer benefits can help put your mind at ease when you make your benefit elections for 2018.