Second of a three-part series: The Benefits of a Health Savings Account
Written by: The Deerfield Team
Despite its unique triple tax advantage, over one third of those eligible for a health savings account do not have one. ¹ Since the average post 65-year-old married couple will incur well over $200,000 in healthcare expenses during retirement, it’s worth considering whether opening an HSA is right for you. What advantages does an HSA have over other savings accounts? Are you able to open one? Should you?
To qualify for an HSA, you must be covered by a high-deductible health plan, not be enrolled in Medicare, and not be claimed as someone else’s dependent.
Eligible individuals must also not be covered by any “other insurance,” including a spouse’s FSA. (Some exceptions apply.)² Your spouse may have non-HDHP coverage, so long as it does not cover you.
What is a High-Deductible Health Plan (HDHP)?
An HDHP is a health plan with higher-than-average annual deductibles, co-payments, and other out-of-pocket medical expenses—for other services. In 2014, the minimum annual deductible for individual coverage was $1,250, and $2,500 for family coverage. The maximum annual deductible and out-of-pocket expenses—which do not include premiums—for in-network services was $6,350 for individuals and $12,700 for families.³
Benefits of an HSA
Control. An HSA is like an IRA in that you control what to do with the money inside the account in terms of investment and when, without having to check in with anyone else. Your contributions stay in the account until you withdraw them. Of course there are tax implications for withdrawal so you would want to check with your tax adviser about those.
Portability. An HSA stays with you if you change employers or leave the work force.
Tax advantages. HSAs offer several distinct tax advantages.
- You can claim a deduction for contributions you make to your HSA without having to itemize them.
- Your employer’s contributions to your HSA may be excluded from your gross income.
- The interest and earnings on assets in your HSA are tax-deferred.
- Distributions used to pay for qualified medical expenses are tax-free.
- Distributions for non-medical (medical, vision, dental, prescription drugs) purchases are allowed however could carry up to a 20% excise tax & ordinary income tax.
HSAs Compared with Other Savings Accounts
How do these benefits compare with other options?
HSA vs. 401(k). You can withdraw money from an HSA tax-free at any age. Unlike 401(k) plans, HSAs have no required minimum distributions. In July 2015, CNN Money published an article titled “Why your next dollar shouldn’t go to your 401(k),” which explains why HSA contributions are sometimes a wiser investment than putting away money into a 401(k).
HSA vs. traditional savings account. Money goes into your HSA account before taxes are paid, while you’ve already paid taxes on money funding traditional savings account.
HSA vs. FSA. A flex spending account is another tax-advantaged health savings plan. But unlike an HSA, which builds over time, FSA money does not roll over; unused funds are lost at the end of the year. HSA accounts also enjoy the advantage of being portable and permanent unlike FSA’s.
HSA vs. Medical Savings Account (MSA). HSAs and HDHPs are not limited to the self-employed or employers with 50 or fewer people, while Archer MSAs were created for only that segment of the workforce.
HSA vs. Health Reimbursement Arrangements (HRA). While HRAs can be paired with standard health plans as well as HDHPs, they are company-owned. HSAs stay with you through changes in employment.
Limitations of the HSA
Only for medical expenses. Because HSAs are built to fund only qualified medical expenses, withdrawing money for any other reason incurs taxes for all account holders, as well as penalties for those under 65. While you can invest your HSA to gain earnings, you first need to meet a minimum balance in some cases.
Over-the-counter medicine reimbursement requires a prescription. Since 2011, Section 9003 of the Affordable Care Act requires that OTC medicines and drugs, except insulin, must be prescribed by a doctor to be considered qualifying medical expenses.⁴
Joined to a high deductible plan. Because HSAs are connected with HDHPs, they are only available to those willing to afford a high deductible health plan. In 2015, an HDHP must have a minimum deductible of $1,300 for individuals or $2,600 for families. Some HDHP holders may have a tendency to resist going to the doctor to avoid using money from their HSA to pay the deductible. That’s not good!
Yearly contribution caps. While there is no overall maximum contribution to an HSA, there are yearly caps. In 2015, total contributions from all sources may only reach $3,350 for an individual plan or $6,650 for a family plan. (An extra $1,000 per year contribution is allowed for those 55 and older.)
Consider whether you are or would like to be covered by a high-deductible health plan, meet the other qualification requirements, want to control your funds and keep growing your account for the rest of your life, and would benefit from the tax advantages of an HSA.
If your answer to all these questions is yes, you’re a perfect candidate for an HSA. If you’re eligible but not sure not sure if an HDHP and HSA make sense for you, calculate whether you would have saved or lost money last year if you had opened an HSA then. It’s up to you to choose the path that’s best for you and your family. We’re here to help you figure out your choices. Don’t hesitate to call on us if you need guidance.
To your good health!
The Deerfield Team
1.Ashlea Ebeling, “The Most Tax-Savvy Use Of A Health Savings Account,” Forbes, http://www.forbes.com/sites/ashleaebeling/2011/11/21/the-most-tax-savvy-use-of-a-health-savings-account/
4.”Affordable Care Act: Questions and Answers on Over-the-Counter Medicines and Drugs”. IRS. September 3, 2010.
Flexible Benefit Service Corporation. “HSA or 401(k)?” Accessed August 14, 2015. http://www.flexiblebenefit.com/blog/hsa-or-401k
Folger, Jean. Investopedia. “Pros And Cons Of A Health Savings Account (HSA).” Accessed August 14, 2015. http://www.investopedia.com/articles/personal-finance/090814/pros-and-cons-health-savings-account-hsa.asp
UPMC . “The Pros and Cons of Health Savings Accounts (HSAs).” Last modified April 17, 2015. http://www.yourhealthcaresimplified.org/news/pros-and-cons-of-health-savings-accounts-hsas-028mpv/
IRS. “Health Savings Accounts and Other Tax-Favored Health Plans.” March 10, 2015. http://www.irs.gov/pub/irs-pdf/p969.pdf
IRS. Publication 696. http://www.irs.gov/publications/p969/ar02.html#en_US_2014_publink1000204020
Fidelity. “Retiree health costs hold steady.” Last modified June 11, 2014. https://www.fidelity.com/viewpoints/retirement/retirees-medical-expenses
Ebeling, Ashlea. “The Most Tax-Savvy Use Of A Health Savings Account.” Forbes. Last modified Nov 21, 2001. http://www.forbes.com/sites/ashleaebeling/2011/11/21/the-most-tax-savvy-use-of-a-health-savings-account/
This article is intended only as a general discussion of these issues & we cannot guarantee the accuracy thereof. It does not purport to provide legal, accounting, or other professional advice. If such advice is needed, please consult with your attorney, accountant, or other qualified adviser. The Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Accordingly, the information provided herein is provided with the understanding that Deerfield Advisors is not engaged in rendering legal advice. Deerfield Advisors strongly advises that clients and/or the reader of this publication contact an attorney to obtain advice with respect to any particular issue or problem discussed here. Also, please know that discussions of insurance policy language is descriptive only. We strongly advise that one’s individual policy & one’s advisor be consulted regarding this subject matter before any action is taken in any way. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. The Deerfield Advisor White Paper Series is a registered trademark of Deerfield Asset Management Inc. DBA, Deerfield Advisors and is produced by Deerfield Advisors for the benefit of its clients, and any other use is strictly prohibited. All rights reserved. Copyright © 2015