Due to the numerous changes with the Affordable Care Act we have received inquiries about the continued use of Health Savings Accounts (HSAs). HSAs are still allowed under the qualified coverage provision of the Affordable Care Act for most plans. HSAs are a pre-tax health savings account that can be used for eligible health care costs like doctor’s visits, prescriptions, and other medical costs. Many employers still offer plans that include HSAs and can be a very attractive option for individuals purchasing their own health insurance.
HSAs have been around since 2003 and are an attractive option because they are typically combined with a high deductible health insurance plan. High deductible means lower monthly premiums for individuals, but higher out of pocket costs when medical costs are incurred. The HSAs supplement this high deductible plan by having funds available for those out of pocket costs. Due to the pre-tax nature of the HSA plan contributions, HSAs are not only being used by the young and healthy anymore. A growing segment of the market is looking to these types of plans due to the tax savings and increased insurance premiums associated with the Affordable Care Act.
When we say HSAs are a pre-tax option this means that on your individual tax return contributions by you are deductible against ordinary income. The 2015 contribution limits were recently released and are $3,350 for self-only coverage and $6,650 for family coverage (with a $1,000 catch-up contribution allowed for those 55 or older). Unlike Flexible Spending Accounts (FSAs), HSAs are not a “use-it-or-lost-it” account. While recent Federal guidance allows carryover of up to $500 of money put into a FSA the HSA is still a more attractive option for those that want to build a reserve of cash for medical costs. Another perk of the HSA is that the money held in the account may be invested. This is a lot like an IRA where there are no tax consequences to investment growth and as long as the growth in the fund is used for eligible health care costs those withdrawals are tax free.
Much like an IRA if you ever need the money for personal reasons you can always pull it out. The funds will be subject to income tax and withdrawal penalty if you are under age 65 or not permanently disabled. So yes, Health Savings Accounts are here to stay for now and may be worth looking into with rising health care costs.