Find Out How HSAs Can Reduce Your Healthcare Expenses
April 15th is a day etched into the minds of Americans as Tax Day. It’s the day that your state and federal taxes are due. Are you ready? Have you done everything you can to reduce the taxes you owe?
At a time in history when the downturn economy has directed much of our spending, Americans are looking for ways to reduce expenses in every area of their lives. One way to reduce healthcare costs is by opening a Health Savings Account (HSA) in conjunction with your health plan. An HSA is a savings and spending account that offers health plan members a way to pay for qualified medical expenses with tax-free dollars, as well as a tax advantaged way to save for future medical and retirement healthcare expenses.
HSAs were originally created by an expanded Medicare bill and approved by Congress in 2003 to help individuals save for the future on a tax-free basis. Individuals must be covered through a government approved High-Deductible Health Plan (HDHP) structure when making HSA contributions.
With more and more companies moving to higher deductible plans, HSAs are becoming a popular alternative to controlling healthcare spending. HDHPs can be thought of as “low cost” plans with lower premiums and higher deductibles. With an HDHP, a member is responsible for satisfying a deductible and paying for initial healthcare expenses. The HSA may be used to cover those expenses. Also, with most HDHP plans, preventive care is offered pre-deductible with little or no member cost to encourage health maintenance.
HSAs can be funded by the member, their employer or a third party and still be tax-free to the HSA accountholder. In 2010, the maximum individual contribution amount is $3,050 and the family maximum is $6,150. Additional catch-up contributions can be made by individuals after age 55.These contribution limits may be subject to change every year by the IRS.
So what types of expenses are considered “qualified medical expenses” in which you can use your HSA funds? These expenses include certain medical goods and services. Some examples are: doctor’s visits, hospital expenses, lab, diagnostic services, prescription drugs, dental and vision care. For a complete list, visit the IRS website and reference Publication 502, Medical and Dental Expenses (http://www.irs.gov/pub/irs-pdf/p502.pdf). Funds used for other purposes are regarded by the government as taxable income, with an additional 10 percent penalty for non-qualified expenditures.
So who’s using HSAs? A survey of employers published by the Kaiser Family Foundation in September 2009 found that 8% of covered workers were enrolled in high-deductible health plans that are offered with HSAs and Health Reimbursement Arrangements, up from 4% in 2006. Additionally, 12 percent of firms offered such plans to their workers last year compared to only 7 percent in 2006. A survey of health insurers performed by America’s Health Insurance Plans (AHIP) found that 6.1 million Americans were covered by HSA-qualified health plans as of January 2008.
An HSA is like your own private bank account used to pay for current healthcare expenses or to save money for future expenses. HSAs are accounts that are owned by the health plan member, regardless of who contributes funds and the money earns interest and other potential returns over time. Individuals on Medicare cannot continue to contribute to HSAs, however you can keep the existing money in your account and use it for medical expenses tax-free. The beauty of HSAs is that it’s your money; even if you leave an employer the funds stay with you. Individuals may choose to invest their HSA dollars in stocks, bonds, mutual funds or other eligible savings vehicles.
So, in a nutshell, you can receive triple tax savings by having an HSA:
(1) tax deductions when you contribute to your account;
(2) tax-free interest or investment earnings and
(3) tax-free withdrawals for qualified medical expenses. Kathleen M. Cramer is the Manager of Product Development for Optima Health, a Virginia-based health plan with more than 440,000 members, nationally-recognized for its quality, service and innovative programs.
HSAs are a great financial vehicle to save for retirement and pay for medical expenses. So, consider choosing a qualified plan and open an HSA today.
Sources: U.S. Department of the Treasury, www.ustreas.gov & Kaiser Family Foundation, www.kff.org