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By Mayo Clinic staff
Original Article: http://www.mayoclinic.com/health/health-savings-accounts/GA00053
Health savings accounts are like personal savings accounts, but the money in them can only be used for health care expenses. You — not your employer or insurance company — own and control the money in your health savings account. The money you deposit is not taxed, and you can invest it in stocks, bonds and mutual funds. To be eligible to open a health savings account, you must have a special type of health insurance called a high-deductible plan. Sometimes referred to as "catastrophic coverage," high-deductible plans act like a safety net if you need extensive medical care.
Health savings accounts were established in 2003 as part of a larger trend known as consumer-directed or consumer-driven health care. Health savings accounts have been promoted by companies and the government as a way to help control health care costs. The theory is that consumers will spend their health care dollars more wisely if they're spending their own money. In addition, doctors and other health care providers will have an incentive to lower their rates because they're competing for consumers' business.
Like any health care option, health savings accounts have advantages and disadvantages. When considering a health savings account (HSA), think about your anticipated health care expenses, your financial situation and how much control you want over your health care spending. If you're generally healthy and want to save for future health care expenses, an HSA may be an attractive choice. On the other hand, if you anticipate needing expensive medical care in the next year and would find it hard to meet a high deductible, an HSA might not be your best option.
|Potential benefits of HSA||Potential risks of HSA|
|You control how your HSA money is spent. Any unused funds stay in your account and can be used for future medical expenses.||People who are older and sicker may not be able to save as much as younger, healthier people who need less medical care.|
|You decide how much money to set aside for health care costs.||Illness can be unpredictable, making it hard to accurately budget for health care expenses.|
|You can shop around for care based on quality and cost.||Some information, including cost and quality, can be difficult to find.|
|Your employer may contribute toward your HSA.||Pressure to save the money in your HSA might lead you to forgo care.|
|Money can be placed in your HSA on a pretax basis or may be deducted from your taxable income.||If you withdraw money from your HSA for nonmedical expenses, you'll have to pay taxes on it. If you're younger than age 65, you'll have to pay a 10 percent penalty, too.|
Sources: American Medical Association, 2010; Kaiser Family Foundation, 2010; New England Journal of Medicine, 2006; U.S. Department of the Treasury, 2010.
You can start an HSA on your own through a bank or other financial institution, or your employer may offer an HSA option. To qualify for an HSA, you must be under age 65 and carry a high-deductible health insurance plan. If you have a spouse who uses your insurance as secondary coverage, he or she also must be enrolled in a high-deductible plan. This high-deductible health insurance plan must be your only health insurance coverage — you can't be covered by other health insurance. However, having dental, vision, disability and long term care insurance doesn't disqualify you from having an HSA.
As its name implies, it's a health insurance plan that has a high deductible (the amount of medical expenses you must pay annually before coverage kicks in). The premiums (the regular fee you pay to obtain coverage) for a high-deductible insurance plan are typically lower than premiums for traditional insurance plans.
However, a high-deductible plan doesn't start paying until after you've spent a thousand dollars or more of your own money on health care expenses. (This unpaid portion of expenses is known as a deductible.) You can use your HSA to pay deductible expenses, copays, coinsurance payments and other noncovered health care expenses.
Not all high-deductible insurance plans work the same. For instance, some cover preventive services, such as mammograms, before the deductible is met. Review the plan's coverage details carefully, including the out-of-pocket maximum — the limit on how much you would have to pay out of pocket for medical expenses in a year.
The Internal Revenue Service decides how much you can contribute each year. A good source of the most up-to-date information on those amounts is the Department of the Treasury's website. In recent years, the contribution limits have been about $3,000 for individuals and about $6,000 for family coverage. The limits are indexed for inflation and adjusted each year. Unspent money in your HSA can be rolled over each year.
If your employer offers a high-deductible insurance plan, you may be able to deposit money into an HSA on a pretax basis. If you open an HSA on your own, you can deduct your deposits when you file your income taxes.
Yes, your employer can contribute to your HSA. But the total of your employer's contribution plus your contribution still must be within the contribution limits.
Yes, but there are a couple of key differences. First, with an HSA you can keep (roll over) any unspent money each year. You can't do that with a flexible spending account. Second, money put into an HSA is yours and can be taken with you if you switch jobs or retire. You can't take money from an employer-sponsored flexible spending account with you if you quit or change jobs. Also, it's important to know that in most cases you can't have both an HSA and a flexible spending account.
It can be challenging. Right now it's difficult to get reliable information regarding the cost and quality of treatment options, doctors and hospitals. Your employer or health plan may offer some Web-based tools, as well as access to someone by phone who can give you some basic information. The hope is that as health savings accounts and other consumer-directed health care options become more widespread, the access to information about cost and quality will expand.
Yes, but if you withdraw funds for nonmedical expenses before you turn 65, you have to pay taxes on the money and a 10 percent penalty. If you take money out after you turn 65, you don't have a penalty, but you must still pay taxes on the money.
Tax Facts: Should I close my HSA when I get a new health insurance plan?
By Louise Norris, HSA store
What happens to your HSA if you switch to a health insurance plan that is not HSA-qualified? It is a good question and understanding how the rules work for HSAs when you are no longer "HSA-eligible" will help you avoid potentially bad financial decisions.
First, "HSA-eligible" just means that you are eligible to contribute to an HSA. You can still own an HSA when you are not HSA-eligible. And you can still withdraw money from that HSA, tax-free if the money is used to pay for qualified medical expenses
Being HSA-eligible includes having coverage under an HSA-qualified high-deductible health plan (HDHP), and with some limited exceptions, not having any other coverage. You also can't be claimed as a dependent on someone else's tax return. When you are HSA-eligible, you can contribute pre-tax money to your HSA, up to the annual limit set by the IRS.
But what happens if your health coverage changes to a non-HDHP (or no insurance at all), or you gain additional coverage, such as Medicare or FSA coverage from your spouse's employer? In that case, you're no longer HSA-eligible, which means you have to stop contributing to your HSA.
But that does not mean you should close your HSA!
You might have well-meaning friends (and possibly not such well-meaning car salespeople or mortgage brokers) encouraging you to cash it out, but chances are that is not your best choice. Of course, in a dire emergency, it may be the only option.
If cashing out your HSA is all that is standing between you and being homeless, then cash out the HSA. But if it is not an earth-shattering emergency, you are probably better off keeping your HSA.
If you close your HSA and withdraw all the money, you are going to have to pay income tax on the withdrawal, plus a 20% additional tax if you are under age 65. That is assuming you are not using the money to reimburse yourself for qualified medical expenses incurred since you established your HSA. If you are using the money for qualified medical expenses, then carry on, as the withdrawal will be tax-free.
The other option, even though you are no longer HSA-eligible, is to ask yourself if you think you might have any medical expenses during the rest of your life. If so, remember that you can just leave the money in your HSA and wait to withdraw it until those medical expenses crop up — even if that ends up being decades down the road. The withdrawal will be tax-free at that point, including investment gains or interest that the account balance earns between now and then.
If you never have HDHP coverage again, your HSA will be a one-way street: Withdrawals only, but no contributions (although the balance could continue to grow due to interest or investment earnings). But keep in mind that you might become HSA-eligible again in the future. At that point, you can simply start contributing to your HSA again.
Consider moving it instead...
From a logistical standpoint, remember that you also have the option to move your HSA balance to a different HSA provider. If your HDHP/HSA was established via an employer and you are leaving that job, the employer may require you to move your HSA. But that does not mean you need to close your HSA. Instead, you can just initiate a transfer or a rollover to a new HSA, which will not trigger any taxes on your HSA funds.
A rollover means the original HSA sends the money to you, and you send it to your new HSA custodian within 60 days. You cannot do this more than once a year, and the onus is on you to ensure that you deposit the money in your new HSA within 60 days.
A simpler way to go about it is a transfer. You just need to open your new HSA and then ask your original HSA to send the money directly to the new HSA. There's no limit on how often you can transfer money from one HSA to another, and you don't need to worry about getting the money into your new HSA in a timely fashion — the two HSA administrators take care of all the logistics for you.
Seek advice from a tax adviser if you have questions about your specific situation, but remember that keeping your HSA (with your current HSA custodian or a new one) after you're no longer HSA-eligible is almost always going to be a better option than cashing it out.