As more and more employers are encouraging consumerism in using healthcare benefits by promoting high deductible health plans to their employees, Health Savings Accounts (HSAs) are coming into favor. These two benefits pair up nicely, in that an HSA allows the employee to pay their healthcare deductibles pre-tax. In addition, the money invested in an HSA grows tax-free and can be withdrawn tax-free as long as it is used for qualified medical expenses.
This type of plan is similar to a Flexible Spending Account (FSAs). However, it has some significant advantages:
- HSAs do not have the "use it or lose it" provision of FSAs. If you do not use your FSA funds for medical expenditures within a certain time period, those funds are lost. HSAs function more like savings accounts. Whatever you do not use in the current year will be carried over to subsequent years.
- The contribution limit is higher for HSAs than FSAs. In 2015, the contribution limit to an HSA for single coverage is $3,350. For family coverage, it is $6,650. And if you are 55 or older, you can contribute an additional $1,000. FSA contributions are limited to $2,550 for 2015.
- HSAs are owned by the individual covered and can be maintained regardless of where they work. FSAs are set up and owned by the employer.
- An individual can change his or her savings election amount at any time with an HSA. Generally, with FSAs, they are limited by the election made at the beginning of the year, unless there has been a qualifying event such as marriage, divorce, or birth of a child.
One particularly noteworthy benefit of an HSA: Since there is no specified timeframe for use of the funds, it can serve as an additional long-term tax shelter. To the extent the funds are not used for current medical expenses, the money will continue to grow tax-free. That money can then be used to cover medical expenses in retirement.
There are a few disadvantages of an HSA:
- Employees cannot participate in an HSA unless they also participate in a qualified high deductible health plan.
- Since the HSA operates like a bank account, you can only use what is actually deposited into the HSA. With an FSA, you can use your annual election amount at any time, whether or not the money has actually been deposited.
A final word of caution: Funds withdrawn from an HSA that are not used for qualified medical expenses are taxable and subject to a 20 percent penalty. Nonqualified withdrawals after age 65 are no longer subject to the penalty, but are still subject to income tax.
Please contact us to help you determine whether you qualify for an HSA and for assistance with setting up an account.
For questions about this topic or to discuss your company's needs, please contact us at Email or 215.441.4600.
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