A Health Savings Account (HSA) is like a 401k for medical coverage. HSA’s have been around since 2004, not that long, and often times they are overshadowed by their evil twin, the Flexible Spending Account (FSA). I have nothing personal against an FSA, and quite honestly they have their benefits as well. My one issue with the FSA is their “use or lose it” motto. The maximum annual FSA contribution is $2,500, and whatever portion of that money that goes unused is lost forever. I don’t know about you, but I do corporate forecasting for a living, and for the two years I contributed to an FSA I was far off the actual amount needed, one year I needed more, and the other year I lost quite a bit…combine those two years and the FSA might’ve been worth it for me.
Who Is Eligible
First, if your healthcare is provided by the company you work for, then they need to offer a health plan that is accompanied by an HSA. You need to be enrolled in a high-deductible health plan (HDHP). This is classified as any health plan with an annual minimum deductible of $1,200 for single person, and $2,400 for a family. Let me stress the benefits of this plan to the young & healthy. Think of this as catastrophic coverage, something of a safeguard for your healthcare that earns interest like any other investment. You might be in your early to mid-20’s, thinking that you needn’t spend too much on healthcare, and that could be true, but an HSA is exactly what you are looking for. HDHP’s often times have lower monthly premiums in exchange for higher annual deductibles. The offset, you invest money into an HSA account in case you need to pay that deductible sometime during the year. If you rarely use your healthcare, no big deal, the money grows tax free, much like a 401k! Regardless, you are insured and protected in case a health emergency arises.
Benefits of an HSA
• The annual contribution limit to an HSA is $3,050 ($6,150 for a family). FSA’s only allow $2,500 a year.
• You can contribute pre-tax dollars to your account, that will earn interest, much like a 401K account.
• Many employers will offer matching contributions to your HSA.
• The tax benefits do NOT phase out based on your income level. How many other tax breaks can you say this for?
• Your money can grow tax free throughout your life, as it rolls over year after year.
• Once you turn 65, you will no longer be penalized for removing the money, even if it’s for non-medical expenses.
I love my HSA account, I’ve used it on numerous medical expenses, including glasses and contacts! Unfortunately, as of 2011, you can no longer use it for OTC medications…which is a shame because I hadn’t paid for contact solution or aspirin with after-tax dollars in 5 years. In fact, for those of you looking to get Lasik surgery, this is a great way to save up the money for the procedure. Think of an HSA as a way to apply a permanent 25% (my marginal tax bracket) discount on all of your medical purchases for life. At the same time you can lower your taxable income and keep Uncle Sam from taking all of your money…the benefits are almost endless.