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Health Savings Accounts: An Overview

Margaret Meyer
Margaret M. Whelehan, CFP®, CDFA®
Vice President, Financial Advisor
[email protected]
(585) 394-4260 x42129

Affordable health care has become a hot button issue with many Americans. A relatively new option — the Health Savings Account, or HSA — has both benefits and drawbacks. Here’s a brief look.

Who Can Have One?

Employers can offer HSAs to eligible employees as an employee benefit. Individuals and self-employed individuals who are under age 65 also can set up an HSA on their own.

What Is It?

An HSA is a tax-advantaged savings account that the account holder can use to pay out-of-pocket medical expenses. An HSA is available only in conjunction with a “high deductible” health insurance plan — for 2012, one with a deductible of at least $1,200 (individual) and $2,400 (family) and that limits annual out-of-pocket expenses to $6,050 (individual) and $12,100 (family).

How Much Can Be Contributed?

The account can be funded with up to $3,100 (individual) and $6,250 (family) in 2012 ($258.33 and $520.83 a month, respectively) and up to $3,250 (individual) and $6,450 (family) in 2013 ($270.83 and $537.50 a month, respectively). These limits will be inflation-adjusted in the future. Individuals over the age of 55 can make additional “catch-up” contributions of up to $1,000 every year.

What Are the Tax Advantages?

Individual contributions to an HSA are tax deductible. Employer contributions are excluded from employee income and deductible by the employer. Money in the account grows tax deferred and no federal income taxes are imposed on HSA withdrawals used to pay the unreimbursed medical expenses (including long-term care expenses) of the account holder and his/her spouse and dependents. Withdrawals for non-medical purposes would be subject to income taxes and a possible 20% penalty.

Is There a Use-It-or-Lose-It Rule?

Unlike its cousin, the health-care flexible spending account, an HSA does not require the account holder to forfeit any money not spent by the end of the year. Thus, individuals who don’t need to use their HSA savings in a particular year simply retain the funds for use in the future. Employees take their accounts with them when they change jobs.

If you are interested in knowing more about HSAs, please don’t hesitate to contact us.