As employers look for ways to control and reduce their healthcare costs, high-deductible plans are becoming more common. This means that more Americans are also becoming eligible for Health Savings Accounts, or HSAs.
These interest-bearing accounts are used both to save for future medical expenses and pay for current out-of-pocket medical expenses using tax-free cash. They are available to individuals under the age of 65 who are enrolled in a high-deductible health plan.
Here are some of the key benefits of HSAs.
HSAs offer three distinct tax benefits. First, HSA contributions are tax-deductible off of gross income, or are pre-tax if made through a payroll deduction. Second, they grow tax-deferred. Third, withdrawals are tax-free if used for qualified medical expenses. These include most services performed by licensed health care providers, as well as prescription drugs and diagnostic devices. They can be used to help with the cost of deductibles, copayments and coinsurance on a high-deductible plan.
Flexible, Portable, Employee-Owned
An HSA is owned and controlled by the individual, rather than their employer or insurance company. This applies even if the account was opened through an employer-sponsored program, or if the employer chooses to contribute to the account.
Accounts are held with a custodian or trustee, which could be a bank, credit union, insurance company or brokerage firm.
No Limit on Carry-Overs
The money in an HSA rolls over year after year with no limit on carry-overs. This differs from health care flexible spending accounts, which may limit a maximum year-to-year carry-over of $500. There is no fear of “using it or losing it.”
Can Be Used for Long-Term Retirement Planning
An HSA can be used to pay for current health care expenses, but can also be a smart long-term investing strategy—especially for healthy individuals with few out-of-pocket medical costs. The money can be grown tax-free in anticipation of higher medical expenses later on, like during retirement.
Before age 65, account owners must pay a 20 percent penalty in addition to income tax on withdrawals not used for qualified medical expenses. But starting at age 65, withdrawals are not subject to the penalty for any reason, and they still remain tax-free if used for qualified medical expenses.
With so many tax benefits, HSAs do have contribution limits. In 2016, an individual may contribute up to $3,350; for a family, that amount is $6,750. Individuals over age 55 may add another $1,000 per year as a catch-up contribution.