What Is a Health Savings Account?
A health savings account (HSA) is a tax-exempt trust established to pay qualified medical expenses incurred by eligible individuals enrolled in a High Deductible Health Plan (HDHP). HSAs have numerous tax advantages for both employees and employers, and are an important part of retirement planning. For those who qualify, an HSA is an excellent tool to plan for rising health care costs later in life. They have some similarities to high-deductible plan (HDHP) medical savings account programs, but with fewer restrictions for eligibility. Unlike a Flexible Spending Account (FSA), you do not have to spend down all of the money in the account each calender year, allowing your contributions to grow tax-free year after year. Employees covered by HSA/High-Deductible Health Insurance Policy combinations are encouraged to take full advantage of the long term planning opportunities afforded by health savings accounts rules. When you open a CamaPlan HSA, your health savings account will be able to invest in a wide array of assets, just as you can with a self-directed IRA. CamaPlan account holders have access to an unlimited number of alternative investment options, including real estate, gold and silver, business ventures, private placements, and loans.
Who Is Eligible?
Health Savings Account IRS regulations state that an eligible individual meets the following requirements:
- Be enrolled in a High-Deductible Health Plan. Health insurance plans must have a minimum annual deductible for an individual of at least $1250 or a deductible for the family of at least $2500. If your health insurance plan has a deductible below the minimum annual deductible amount, it is not considered an HSA-eligible High-Deductible Health Plan.
- Must not be claimed as a dependent on anyone’s tax return.
- May not be covered by another major medical health insurance policy; however, other health coverage plans for vision, dental, and disability are permissible.
Eligible individuals are permitted to open HSAs at any age; however, once you are enrolled in Medicare, you may no longer contribute to the program. For this reason, employees may wish to delay enrolling in Medicare as long as they are covered by a HDHP to maximize the benefits. The current annual health savings account limit for contributions is up to $3250 for a HDHP that covers an individual family member, or up to $6450 per year for family coverage health plans. Individuals ages 55 and up are allowed to make up to $1000 additional in yearly “catch up” contributions. Spouses that qualify for “catch up” contributions must each maintain separate HSAs; HSA rules require separate accounts for catch up contributions, even in family plans.
Benefits for Employees
A health savings account has significant tax advantages for eligible employees. Much as the IRS established the small business lending fund to provide financial assistance to small companies, HSA regulations were created to help individuals manage the rising cost of healthcare. Account owners enjoy several benefits:
- Contributions are typically withheld from your paycheck using pre-tax dollars, thus reducing your taxable income. Alternatively, you can contribute post-tax dollars and file for a Health Savings Account deduction on your income taxes. You may also fund your HSA with a one-time rollover from a qualified retirement savings account.
- The funds you contribute grow tax-free, so each HSA contribution you make can grow exponentially over the years. As long as withdrawals are made for qualified medical expenses, the earnings are also tax-free. If funds are withdrawn for any reason other than a qualified medical expense, you must pay the taxes on the distribution at your current income tax rate, much like for a Traditional IRA. (Early withdrawals may also incur a 20% penalty; consult your tax professional for more information on state and federal tax implications of HSA withdrawals.)
- Tax-free distributions can be used to pay for qualified medical out-of-pocket expenses or to reimburse for qualified expenditures including prescription drugs, insulin, physician visits, hospital fees, and other out-of-pocket medical and dental expenses listed in IRS Publication 502. In general, you are not able to withdraw from your medical savings fund to pay for health insurance premiums. Exceptions exist for long-term care insurance, healthcare continuation coverage (such as COBRA), healthcare coverage while receiving unemployment compensation, and Medicare and other healthcare coverage if you were 65 or older except for Medicare supplemental policy premiums. Account owners are required to report qualified distributions on Form 8889.
- Employers who offer high-deductible plans are permitted to contribute to an employee’s HSA to offset the higher annual deductible. Employer funds do count towards annual contribution limits; the employee may then contribute an additional sum towards the total allowable annual amounts. Coupled with the low premium rate structures of HDHPs, this can represent a significant cost savings. The Government Accountability Office reported that people enrolled in consumer-driven health plans typically spend less annually on healthcare. Employers also benefit from a reduction in health insurance premiums, lower payroll taxes, and tax-deductions for their contributions to employee health savings accounts.
- There are no income limits for those who are covered by a HSA/High-Deductible Insurance Plan. This is a benefit for highly compensated employees with this type of health coverage.
- HSAs are portable if you change jobs or retire. In addition, there are no required minimum distributions for individuals of retirement age, so your investments can continue to grow until you need the funds.
- Health care reform under the Affordable Care Act has increased the advantage of an HSA over a Flexible Spending Account, due to the lowered contribution limits for FSAs. Additionally, now that preventative care is covered without a co-payment or deductible, the protection and affordable premiums of HDHPs are an even more powerful tool to manage healthcare spending.