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What You Need to Know About Health Savings Accounts

If you are looking for a way to stretch your paycheck to cover unexpected expenses including hospital, dental or vision bills, then the answer for you may be health savings accounts (HSA). These flexible spending accounts allow you to save thousands of pre-tax dollars annually for you and your family.  If your employer has an HSA program in place, you can set aside up to $3,400 in 2017 for an individual or $6,750 for a family.  If you are over 55, those annual contribution limits are increased by $1,000. 

Even if you don’t have an employer who participates, you can set up an HSA independently, according to the Internal Revenue Service.  A HSA is one of the most financially savvy ways you can save.  Not only is it a pre-tax account—meaning you are not taxed on funds deposited—but if you withdraw the money for approved medical expenses, it might not be taxed at all!

More than 16 million have HSAs

More Americans are taking advantage of one of the sweetest deals available. In 2016, there were more than 18.2 million health savings accounts in the United States with almost $34 billion in assets.  This is a 25% increase in the number of accounts from 2015, and a 22% increase in the amount of assets from the previous year, making HSAs some of the fastest growing financial instruments in popularity. Devenir Research, a health industry analyst, predicts that the number of HSA accounts will grow to 27 million with total assets of more than $50 billion by the fourth quarter of 2018.

There are plenty of benefits to a health savings account that is fueling this popularity.  In addition to the tax-exempt funds, a HSA can also be maintained for years.  That means that if you don’t withdraw those funds, your HSA can continue to grow, year over year. That tax-free money can also accrue interest, or even be used to invest in mutual funds.

If a medical emergency should arise, you may be able to apply those funds to cover any expenses.  You can pay off these bills immediately if you are in need, but you also have the option of allowing your account to grow.  The IRS allows you to pay off qualified medical expenses at almost any time, as long as the medical emergency took place after the creation of the health savings account.  So you may allow your HSA investment to grow before withdrawing funds for an itemized medical deduction.

You may also be happy to learn the many things that a HSA can cover. In addition to a wide variety of medical expenses, you may also use funds for dental treatments.  Even some eye exams and prescription glasses are covered. HSA funds may also be applied to Medicare Part B, Part D or Medicare Advantage premiums. Finally, if you want to withdraw funds for non-health related expenses after retirement, that is allowed, although those funds may be taxed.

Vital supplement for high deductible health plans

A very important reason why so many Americans are using health savings accounts is the growing cost of employer health plans. In 2016, the average annual premium for an employer-sponsored family health plan was $18,142, up almost 3% from the year before.  Furthermore, the deductible—or the amount the insured must pay before insurers start covering expenses—rose almost 12% or, on average, $159 to $1,478 in 2016.  For many families, this surge in premiums and deductibles has put an enormous strain on household finances.

Many employers recognize that this loss of health coverage jeopardizes the solvency of some employees, so many have established supplementary health savings account programs to help fill in the financial gaps. Some employers are even willing to make contributions to employee health savings accounts; in 2014, almost two thirds of employers made payments to employee HSAs, on average $515 annually.

Can be set up independently of your employer

If you would like to join your employer’s health savings account program or start your own, you must meet certain requirements:

  • You must enroll in a high deductible health plan that fails to completely cover all medical costs
  • You cannot be eligible for Medicare or another health plan (some exceptions may apply)
  • You cannot be claimed as a dependent on another’s tax return.

In 2017, if your health plan has a deductible of $1,300 for an individual or $2,600 for a family, you likely qualify for a HSA plan.

Once you enroll in a health savings accounts, you have until April 17, 2017 to make the full contribution to your 2016 HSA, which was $3,350 for an individual or $6,750 for a family.  These amounts go up to $3,400 and $6,750 for 2017.  If you are 55 years or older, you may also raise these limits by $1,000. If you opened the health savings account prior to December 1, 2016, then you are eligible to make a full contribution for the year; if you opened after this date, you may be limited to a lesser amount. Check with your HSA administrator or the IRS to determine your eligibility.

Even if your employer is offering health savings accounts, you are not obligated to join. While there are some convenient benefits to an employer-sponsored plan, including easy-to-use claims processing or employer contributions, you may still opt to set up an account independently.

If you are not joining a HSA plan through your employer, you have the option of shopping for an HSA administrator.  Many banks or brokerage firms now offer HSA plans that charge a low fee and feature investment options like mutual funds, stocks or other traded funds. Many health savings accounts are similar to a low cost savings account and may include a debit card for convenience. You are not obligated to remain with your HSA administrator; if you like, you may transfer your health savings account funds to another financial institution without any penalty, similar to an IRA rollover.

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