The Independent Investor: Health Savings Accounts a Good Idea

Does your employer offer a health savings plan? Many do, especially if your company's health insurance has a high deductible. If you aren't taking advantage of it, you should and here's why.

Health Savings Accounts (HSA) were created as a way to help control rising health care costs. An HSA is an account, similar to a personal savings account or an IRA that you can open at work or on your own. Employers consider it a supplement to their high deductible employee health insurance plan (HDHP).

How do you know if your health insurance plan qualifies as a high deductible? Usually, HDHPs won't start paying out until after you've spent at least $1,300 (individual) or $2,600 for a family in expenses with your own money.

HSAs are used to pay for things your employer plan doesn't cover. Qualified medical expenses such as co-pays, health plan deductibles and other non-insurance covered medical expenses such as dental and vision expenses. You — not your employer or insurance company — own and control the money in your HSA. The government and the health insurers believe that most people will spend their health care dollars more wisely if they're using their own money.

HSAs function somewhat like a 401(k) or 403(b) plan. You can make contributions from your paycheck on a pre-tax basis. Your employer can also match some percentage of your contributions. No matter how much you make, you can open a HSA plan. Even though you may have already maxed out all of your other available tax-deferred savings plans, you can still open a HSA.

Health Savings Plans offer a triple tax advantage in an age where tax shelters are few and far between. Any contributions to the plan, investment earnings you may make, and money you take out for qualified medical expenses are all exempt from federal taxes.

There are some eligibility rules that do apply before you can qualify. You must be already covered by a HDHP. You can't have other health coverage that is not an HDHP (including Medicare). And you can't claim yourself as a dependent on another person's tax return.

The maximum you can contribute in any single year, as determined by the Internal Revenue Service, is $3,350 or, if you have a family plan, $6,750. These maximum levels are subject to yearly adjustments for inflation. That's also good news given the ever-escalating cost of health care.

So what happens, you might ask, if I contribute the maximum and I don't use it in the first year?

The money simply accumulates in your HSA account, rolling over year after year and hopefully making more and more investment returns. You can invest it in the stock or bond market or just about anything else you want. If you switch jobs, you can roll it over with you.

The only issue is that if you take the money out for anything other than medical expenses, you will pay taxes on it. If you take it out before 65 years of age, you will also pay a steep penalty.

If you are a generally healthy individual and want to save for future health care expenses, this is the way to do it. Or, if you are near retirement, a HSA makes a lot of sense because you know your medical expenses are going to increase in the future.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.