The ABCs of an HSA

According to the Centers for Disease Control and Prevention, the United States’ health expenditures as a percent of Gross Domestic Product (GDP) were an astonishing 17.4% in 2013. That’s $2.9 trillion dollars or $9,255 per person! With more than one in six dollars of the nation’s income being spent on health care, it is critical that individuals take advantage of the options available to them to pay for these expenses. Consumer-Directed Healthcare (CDH) accounts are the most popular options because they allow individuals to set aside pre-tax money for expenses that might not be fully covered under traditional healthcare plans. The benefits don’t stop there! Especially not for Health Savings Accounts, often simply referred to as HSAs. These type of accounts have the following benefits:

• They consist of interest-bearing, FDIC-insured checking accounts as well as investment accounts, allowing individuals to potentially grow their savings via well-diversified portfolios

For 2015, total contributions by account holders, family members, or employers cannot exceed $3,350 for individual coverage and $6,650 for family coverage. Individuals 55 or older can make an additional catch-up contribution of $1,000.

• Contributions made by employers, although not tax-deductible for the account holder, are excluded from the account holder’s gross income
• Contributions are tax-deductible ; Tax payers do not need to itemize deductions to reap the benefits as this deduction is “above-the-line”
• Interest and investment earnings accumulate income-tax free
• There is no “use it or lose it” feature – funds always belong to the account holder, even upon termination or retirement
• Distributions for qualified medical expenses are always tax-free – Take a look at the list – even acupuncture is included!
• After age 65, funds can be used for any purpose without penalty (20%) but will be subject to income tax if not used for qualified medical expenses.

Although all of these benefits are great, we can’t help but emphasize the last one. A Health Savings Account can not only be used to create an emergency fund for medical expenses, but it can also serve as a retirement savings vehicle – funds not needed for medical expenses may be used for other expenses at retirement age.

You may be thinking “There must be a catch!” There’s not, but there are eligibility requirements. An account holder must:

• Be covered by a high deductible health plan (sometimes referred to as an HDHP)

For 2015, a plan is considered HDHP if the annual deductible is at least $1,300 per individual and $2,600 for family coverage. In addition to these minimums, there are also maximum limits on annual out-of-pocket expenses for HDHPs. For 2015, annual out-of-pocket expenses cannot exceed $6,450 for an individual and $12,900 for a family.  

• Not be covered by any other comprehensive health plan that is not an HDHP
• Not be covered by a general purpose health care Flexible Spending Account (FSA) or Health Reimbursement Account (HRA)
• Be under age 65
• Not be eligible for Medicare
• Not be claimed as a dependent on another person’s tax return

With the increasing (and increasingly expensive) medical needs we all experience as we get older, taking advantage of the available options to pay for these expenses is more important than ever. Why not take advantage of the tax-deductible contributions and tax-free distributions for one of the nation’s largest expenditures?