Benefits of Opening an HSA

Introduction

A health-savings account, or HSA, is one of the most underutilized saving accounts.

As monthly premiums are significantly less than other health plans, an HSA is a powerful means by which to limit healthcare costs and their associated tax burden, whilst saving for future medical expenses.

One of the common misconceptions about opening an HSA account is that you must be a business owner. The reality is that anyone can open an HSA account if they have the correct insurance plan; what is known as the high-deductible health insurance plan (HDHP). Nor does your employer need to establish the account for you. Instead, the employer merely needs to offer the qualifying insurance plan, or, if not, then you yourself are eligible to open the account.

Though there are many benefits of opening an HSA, there are also some drawbacks. We explore many of the notable disadvantages below. First, though, let’s sketch out what an HSA account is and explore the reasons why you might consider opening such an account.

What is an HSA Account?

As its name suggests, an HSA account is a savings account for healthcare expenses.

The account was birthed by legislation passed in 2003; as part of the Medicare Prescription Drug Improvement and Modernization Act. The fundamental function of an HSA account is clear: to allow persons with a high-deductible health plan (HDHP) to pay for current medical expenses, and to pay for future medical expenses, in a tax favorable capacity.

As alluded to earlier, an HSA account can be opened by anyone – on the basis that they have a HDHP. The account may be opened by you, or it may be opened on your behalf by an employer. Additionally, an HSA account may also include and cover your spouse and family.

Of course, HDHPs do not cover all medical expenses. For example, only major injury or disease is included. Other expenses, such as immunization and routine check-ups with your healthcare professional, are not included. For a full list of medical expenses eligible for tax-free submission, consult IRS Publication 502.

You may contribute to an HSA account if you are not covered by any other plan other than an HDHP; if you are not subscribed to Medicare; and if you have not been registered as a dependent on a third-party tax return.

Of course, your deductible must be met before HSA account benefits are reaped. For 2019, the minimum and maximum deductible values are:

 

Minimum

Maximum

Individuals

$1,350

$6,650

Families

$2,700

$13,500

Benefits of Opening an HSA Account

Below, we review the benefits of opening an HSA account under two headings: eligibility and contributions, and the tax implications of an HSA account.

Eligibility/Contributions

As we have learned, anyone can open an HSA account if they have the correct insurance plan; the HDHP plan. Many individuals / families are unaware that they can benefit from the tax advantages that this type of account confers.

Nor are contributions limited to you. Your family, employer or relative – or anyone else for that matter – can provide contributions on your behalf.

Tax implications

Contributions to your HSA account are deductible from either your gross pay or your business income (see table above for minimum and maximum 2019 values). Contributions made on behalf of your employer, via payroll deposits, are usually done with pre-tax dollars – meaning that they are not subject to federal income tax.

In addition, contributions made to the account enjoy tax-free status. Nor do you lose the funds, either – as funds roll-over to the following year where you can add to existing contributions. Even if you change employer or retire, the funds can continue to grow, tax free.

However, after you turn 65 you may withdraw the funds for non-healthcare purposes, but these withdrawals are then subject to federal income tax. Using the funds for non-healthcare purposes before 65 results in a 20 percent penalty.

Tax free status also extends to withdrawals, too.

However, you are permitted to only spend on qualified healthcare expenses. Still, as an HSA account owner you may – for example – add contributions on the way to your physician’s appointment; a convenient means to pay that day’s medical bills with your HSA debit card.

Furthermore, any interest harvested on the account enjoys tax-free status.

Conclusion

Opening an HSA account can add enormous practical, convenient financial value.

An HSA account is not for everyone, though. For instance, individuals who foresee high healthcare costs may prefer to opt for a low-deductible healthcare plan. In addition, one of the drawbacks of an HSA is their high-deductible demand, as not everyone has the means to meet this requirement. Moreover, your medical costs may far exceed what you had initially anticipated – meaning that, with insufficient funds, you are unable to cover your expenses.

For individuals unaffected by these circumstances, then, an HSA account is a great way to manage healthcare expenses – both now and in the future – and, alongside the tax advantages that the account carries with it, it can also mean paying less taxes on your annual tax return.

For these reasons and more, and for the relative flexibility in eligibility, an HSA account should be considered more than it currently is, for both individuals and families alike.

Romeo Razi
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