Worried about the increasing cost of health care? Willing to secure your future to manage the health care related expenses ? Then here is an excellent opportunity to open a health savings account. Health savings account (HSA) is a tax benefit account for individuals who are covered under the high deductible health plans (HDHPs). This account helps them to save money for those conditions which are not covered by HDHPs. There is a set limit for contribution to this account and can be done by the individual as well as the employer every year. These contributions that are invested over a period can be used to pay the current health care as well as the future health care expenses.
Eligibility to obtain a HSA ( Health Savings Account )
To be eligible for HSA the individual must have a HDHP – High Deductible Health Plan. In HDHP is a health plan with much low premiums and higher deductibles than a traditional health insurance plan. Even though HDHP is a high Deductible the monthly premiums are much lesser than the lower deductible plans. HDHPs are intended to cover expenses arising of any serious illness or injury, but not the annual physical check up, immunizations, and the screenings.
As per the federal guidelines an individual is eligible for HSA (Health Savings Account )if
- Covered under HDHP from the beginning of the month
- Not covered under non-HDHP plan
- Not under Medicare.
- Not claimed on someone else’s tax return as dependent.
You must meet all the above requirements to be eligible for Health Savings Account (HSA)
Health Savings Account Deposit and HSA Contribution limits
There will be question in your mind regarding how much you should contribute to Health Savings Account Deposit ?The contributions to your HSA account can be done at anytime and any number of times in a calendar year and till the 15th of April of the same taxpaying year. It could be a single time payment or multiple lump sum payments, whichever is convenient to you. The Internal Revenue Service (IRS) sets limits for amounts that can be contributed by you and your employer annually. For this year the maximum limit for individual contribution is $ 3400 and for families is $ 6750 per year. If you are 55 years or more at the end of the taxpaying year then you add up to $1000 per year then onwards.
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Withdrawals of HSA (Health Savings Account )
Withdrawal of funds from HSA does not require pre approval from the HSA trustee or the insurer.
How to withdraw HSA fund ? It can be withdrawn using debit card that is provided, or by cheques, or even reimbursement is allowed similar to medical insurance. One or more withdrawal methods are available with HSA. The withdrawals are not subjected for medical expenses attract an income tax as well as 20% penalty. This penalty is waived for those above 65 years of age or disabled at the time of withdrawal. Withdrawals done for medical expenses need to have valid proof. If any money is left in HSA it can be withdrawn later at any time. If the person dies then the money is transferred to the beneficiary account.
Tax benefits of HSA ( Health Savings Account )
HSA is a good tax saving way of saving funds for health care expenses. This is an ideal option as it allows paying for the current health care costs as well can save for the future. It is a triple tax benefit account. The first and major advantage with this account is the contributions are tax deductible or if paid from the salary then its pre-tax. Second, the earnings and interest earned is also tax free. If the funds are withdrawn for medical purposes and if it is substantiated by bills then the withdrawals are also tax free.
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Advantages of Health Savings Account ( HSA )
HSA offers an excellent option to save as well as to pay for your medical or any health care expenses. Here we have discussed the benefits of HSA or the advantages of Health Savings Account –
- Not only you but others too can contribute to the HSA created by you. It could be your friends and family, employer, or anyone who wants to be of some help to you.
- Whatever contributions you do to your HSA are federal income tax free as it is pre-tax dollars that you pay. In case, your employer wants to pay you then it is not included in your gross income.
- Payments done after-tax dollars are income tax deductible. While filling tax returns you will owe a small quantity of tax at the end of the year.
- While you withdraw funds from HSA it is absolutely federal or state tax free if used for health care expenses.
- All the interest or any other income earned in relation to this account is tax free.
- If any excess funds are left in your account towards the end of the year, it is carried forward to the next year.
- Irrespective of you changing your job or employer or the health insurance plan, whatever funds remain in. The HSA account will grow and the earnings are tax free.
- Most of the HSA accounts issue a debit card through which you can pay your health care bill as well as use it to withdraw cash.
HSA is a very convenient option to save and pay for your health care needs.
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Disadvantages of HSA account
If you are thinking about the demerits of HSA here it is listed –
- Even though you pay a small premium every month it is difficult to manage finances to pay the deductibles as it is a high requirement.
- In some cases, the health care cost may exceed your HSA savings and it may be not possible to cover the expenses with HSA money.
- Before the age of 65 if you withdraw the funds from HSA for non health care purposes it can attract tax as well as 20% penalty for you. After 65, you still owe tax but you will be exempted from penalty.
- Maintaining records is very essential to prove that the money withdrawn by you is used for health care purposes.
- Some of the HSAs charge a monthly fee as maintenance or for every transaction. This fee is just the nominal fee. Some institutions do not charge any fee if the desired minimum balance is always maintained in the account.
A health savings account is not ideal for all. It is for only those individuals who would want to save for health care costs while saving for the future.
