Health Saving Accounts
Alternative Funding | Health Savings Accounts
HSAs (Health Savings Accounts) are a viable alternative in health insurance plans. An HSA is a custodial account in the form of a tax-exempt trust that is established for paying for qualified healthcare expenses of an individual and/or his or her spouse and dependents. HSAs were designed to provide eligible individuals with three federal tax benefits:
- HSA contributions are tax-free,
- Interest and other earnings on HSA contributions accumulate tax-free
- Amounts distributed from an HSA for qualified healthcare expenses are also tax-free.
HSAs are usually offered in combination with high deductible health plans (HDHPs). To be HSA-eligible, an individual must be covered under an HDHP and not also covered by another health plan that is not an HDHP (with a few exceptions). HDHPs generally have lower monthly premiums and higher deductibles than traditional health plans. HSAs can cover medical expenses until the HDHP deductible is reached. Because HSA amounts are non-forfeitable, amounts contributed to an HSA can increase savings for future health care needs, even into retirement.
In general, money placed into an HSA can be withdrawn at any time. Any HSA withdrawal used for a purpose other than to pay for qualified medical expenses is taxable as income and subject to an additional 20 percent penalty. After an individual reaches age 65, the additional penalty tax does not apply to HSA withdrawals.
The basic elements of HSAs are:
- HSA’s are owned and controlled by the employee/individual. HSA owners are responsible for reporting HSA contributions annually and also any distributions to the Internal Revenue Service (IRS) as an attachment to their IRS Form 1040 (U.S. Individual Income Tax Return).
- HSA contributions are non-taxable, and can be made by the HSA owner, an employer, a family member or any other person for the months during which the owner is HSA-eligible.
- HSA contributions are subject to annual limits.. The amount of the annual limit depends on whether the HSA owner has individual or family HDHP coverage.
- HSA funds, including interest and earnings, accumulate tax-free from year to year. HSAs are not subject to the “use it or lose it” rule applicable to health flexible spending accounts (FSAs). HSAs are portable, meaning individuals keep their HSAs even if they change jobs, change medical coverage or make other life changes.
- Even if an HSA owner is no longer HSA-eligible (for example, because the owner is no longer covered under an HDHP), he or she can still use accumulated HSA funds to pay for qualified healthcare expenses on a tax-free basis.
- HSAs are an inheritable asset. If a surviving spouse is the beneficiary, the spouse becomes the owner of the account and can use it as if it were his or her own HSA. For other beneficiaries, the account will no longer be treated as an HSA, and will pass to a beneficiary or become part of the deceased individual’s estate.
- HSAs can help individuals become better health care consumers by giving them more of a stake in controlling their health care finances.
- HSAs are not for everyone. The decision of whether to opt for HSA/HDHP coverage is different for each individual, and may depend on the predictability of health care costs. If an individual is generally healthy and/or has a reasonable idea of health care costs, then HSA/HDHP coverage may make more financial sense than traditional health plan coverage.
Is a Health Savings Account right for you? Tevis Insurance Solutions can provide expert advice. Call us today at 877-838-4779.