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health savings accounts

The basics of health savings accounts

People who want to save on health insurance costs will often choose a high-deductible plan. These plans charge less in premium than standard insurance plans, and are often used by individuals and families who don’t have regular medical needs and just want something to cover major illnesses and injuries.

The major downside of a high-deductible plan is that it typically doesn’t cover any medical expenses until you have reached the annual deductible, which is, as the name implies, high (some plans will pay for preventative care without requiring the deductible to be met).

In 2016, the IRS minimum deductible to quality as a high-deductible health plan was $1,300 for individuals and $2,600 for family coverage. The maximum deductible was $6,550 for individuals and $13,100 for families.

To help individuals and families pay for expenses before they reach the deductible, health savings accounts (HSAs) are available.

An HSA is like a personal savings account; only the money is designed to cover health care costs. Only people enrolled in a high-deductible heath care plan can set up an HSA.

In addition to being limited to people with high-deductible health plans, which include catastrophic plans, there are other strict rules governing HSAs, including:

IRS annual contributions limit for 2016 or $3,350 for individuals and $6,750 for families.

Insureds must be under age 65.

This high-deductible health plan must be your only health insurance. If you have a spouse who uses your insurance as secondary coverage, he or she also must be enrolled in a high-deductible plan.

Advantages and disadvantages of HSAs
Some of the advantages of HSAs include:

Your employer can contribute to your account. Keep in mind that the total contributions from you and your employer cannot exceed the IRS limits listed above.

In addition to opening one with your employer, you also have the option of starting an HSA on your own through a bank or other financial institution.

The money you contribute to an HSA is tax-free. So if you contribute $2,000 to an HSA in a tax year, your taxable income will be reduced by $2,000.

You control how your HSA money is spent. You can shop around for care based on quality and cost.

Some of the disadvantages of HSAs include:

It can be challenging to save enough to cover medical expenses, especially since you’ll be paying 100 percent of most procedures until you meet the deductible.

If you take money out of your HSA for nonmedical expenses, you’ll have to pay taxes on it plus a 20 percent penalty.

HSAs vs. FSAs
Health savings accounts are not the same as flex savings accounts (FSAs). And in most cases you have to choose one or the other; you can’t have one of each.

The main similarity between the two is that money deposited into the accounts is tax-free.

Whereas HSAs can only be used with high-deductible plans, FSAs can be used for standard health plans.

FSAs also allow you to access funds that are not yet deposited into your account. For example, if you budget $2,000 for your FSA for the year, your employer will deduct an amount per month or per pay period that totals $2,000. But the entire $2,000 will be available to you at the beginning of the plan period, which is usually January 1.

HSAs, on the other hand, require the money be in the account before it’s used. So if you budget $200 a year for your HSA, you may only have $200 to spend on medical expenses at the beginning of the plan year.

One advantage of an HSA is that you don’t have to spend your full amount each year. Whatever you have in the account at the end of the plan year will roll over. Plus, HSAs are portable, meaning you can take the account with you if you leave your employer.

FSAs only allow users to roll over $500 per year. Any unspent funds above that limit are forfeited by the account holder. Also, you can’t take money from an employer-sponsored FSA if you quit or change jobs.