Feb 8, 2012
Health savings accounts are a relatively new concept, developed in response to healthcare consumers demand for something similar to an FSA (flexible spending account) but without the one major drawback; HSA funds roll over year after year, whereas the consumer forfeits the remaining balance of an FSA at year end. The funds removed from the employee paycheck are still withheld from pre-tax dollars, but use of the funds are regulated in a manner similar to IRA’s (indicidual retirement accounts). Hence, many people are switching to HSA’s.
photo credit: Seattle Municipal Archives
Owned by the employee, not the employerOther differences that make these health savings accounts more desireable than FSA’s include,
- Available to employees with a health plan having a high annual deductible
- Contribution limits are higher, allowing the employee the flexibility to use this account in a manner more similar to an IRA, but with the advantage it is easier to withdraw amounts for qualified medical spending
In effect, the bill signed into law in 2003 by President George W. Bush attempts to provide the same advantages as both IRA’s and FSA’s, but without the drawbacks. These were part of a larger reform called Medicare Prescription Drug, Improvement, and Modernization Act which replaced the Medical Savings Accounts.
Within 4 years of operation, HSA’s covered over 4.5 million Americans and about three-quarters of these were employer-sponsored plans, meaning that companies were clearly using these plans as a benefit for their employees.
This is smart, for although employers could set up FSA’s, HSA’s provide the same benefits except the employee owns the account, thus making it an excellent benefit offering, especially among highly competitive fields of work.
Would You Benefit from an HSA?
As with any plan developed by the government, there are arguments both pro and con regarding HSA’s. Naturally, there are advocacy groups lining up on both sides of the issue and the debate is likely to continue for years. The single largest argument against these accounts is that, unlike a traditional savings account (which is taxable, both on the income and the interest), HSA’s are subject to the same market devaluations and falls as other such investments; all fall outside the protection of the FDIC. However, given the advantages, many consumers consider HSA’s to be a good option.
Regardless, the benefits to the employee include,
- Tax reductions – Contributions are pre-tax and not taxed unless withdrawn for sue other than medical
- Simplicity of use – Many carriers are now offering cards similar to a debit card, but for use only for qualified medical expenses; some provide checks; some offer flexible withdrawal methods
- Added Qualified Expenses – many expenses not often covered by health insurance, such as chiropractor’s, eye care, dental, and DME (durable medical equipment) can be purchased using these funds (in other words, whereas such expenses would not be covered by the deductible, they can still be purchased using the pre-tax dollars in the account.
- Simplified records – many people who use these accounts also itemize taxes; many HSA providers provide an annual statement of expenses, making tax time a breeze
- Funds for other-than-medical-use – can be withdrawn much easier than with an IRA, but is still subject to a tax penalty of 20% UNLESS the account holder is 65 or disabled.
- Rollover – because this fund is more akin to an IRA, the funds roll over to the next year and the account grows and accrues interest
If you have been given the option to consider a health savings account by your employer, take the time to review all options offered and be sure to speak to your tax advisor to receive the latest information affecting your situation.
Then, armed with this information, you can make an informed decision; most likely, you will opt in favor of these savings plans, for it certainly appears that the benefits greatly out-weight the drawbacks.
Sam Mauz is a financial blogger who works with a company that sells pay day loans. When not writing or reading about finances Sam can be found hiking or doing other outdoor activities.