With the new health care reform act having just been passed by our government, health care is a hot topic right now, and I want to help you out in one of the areas. Health Savings Accounts with a high-deductible health care plan were created to give both individuals and families the opportunity to use tax-free savings that have been paid into a Health Savings Account (HSA) to fund medical expenses. This sounds like a great deal on paper, but not everyone will be in the right position to take out a HSA. Owning a HSA with a high-deductible health plan is much different from the HMO and PPO plans we are accustomed to being offered by employers. This post takes a look at whether a HSA health plan is the best option for you.
Do You Qualify For a HSA?
To have a HSA, you need to have a high-deductible health plan in place as your only health insurance coverage and pay in a certain amount before coverage begins. For 2010, this amount is $1,200 for individual coverage and $2,400 for family coverage. In addition to this, there is also some disqualifying criteria that can mean that you’re not eligible for a HSA plan including, being aged over 65, being enrolled in a Medicare plan, and being claimed as a dependent on someone else’s tax return.
How Much Can You Contribute?
For 2010, the annual contribution to a HSA is $3,050 for an individual and $6,150 for a family. These figures will vary from year to year but tend to be around the $3,000 and $6,000 marks. Your employer can also make contributions to your HSA, but you still need to stay within the annual contribution limits. If you’re aged 55 to 64, you can make ‘catch-up’ payments to the tune of $1,000 for 2010.
The Advantages of Having a HSA
There are several reasons why having a HSA can work in your favor. Here are a few of them:
1. Tax Breaks. HSA Insurance plans can offer some big tax benefits. The main one comes from being able to pay money into your HSA before taxes are taken out of your paycheck so you pay less taxes on your income. To be eligible for this, your employer needs to have a ‘cafeteria’ plan (also known as a ‘salary reduction plan’) which allows them to reduce your taxable income. If your employer doesn’t offer this or you work for yourself, you won’t be able to take advantage of this particular tax break, but you can still add money to a HSA. There is also the option to deduct your HSA savings from your tax return. This is an ‘above-the-line’ deduction, which means that it is used to work out your Adjusted Gross Income (AGI). It doesn’t matter whether you usually itemize your deductions or take a standard deduction
2. Withdrawals are tax-free. You can make withdrawals without being penalized for taking the money out as long as you’re using it strictly for health-related expenses.
3. Benefits aren’t lost. HSAs are much the same as a savings accounts in that you pay money in and can leave it there for as long as you like without having to spend it. As long as the money is spent only on health-related expenses, tax benefits won’t be lost if you don’t spend the money until much further down the line. If you don’t use the money by the time you’re 65, you can withdraw it for any purpose without taking the normal 10% penalty tax.
4. Money can be invested. If you want to invest the money in your HSA, you can do this in a range of products including stocks and mutual funds.
5. More control. With a HSA, you can decide how much money is deposited and how the money is spent. If you can’t afford to put much money aside one month, you won’t be missing a premium.
How to Find a HSA Plan
One good place to look for a HSA plan is the eHealth Insurance website. Alternatively, you can open a HSA with banks and other financial institutions. Your employer may even offer a HSA.
It makes sense to open a HSA if you’ve already got a high-deductible health plan, especially if you’re in good health and don’t have chronic health issues. However, if you’re someone who has a chronic condition and are going to need regular visits to a doctor or repeat prescriptions, a HSA may not be the best option for you; because your health-related expenses are likely to be high and continuously eating into your HSA balance, you won’t have much opportunity to save for future medical expenses.
(photo credit: Lori Greig)
