Health care consumers with high-deductible health insurance plans may want to consider establishing a health savings account to pay for qualifying out-of-pocket medical expenses using tax-free dollars.
“Health savings accounts can be a useful tool to help with the cost of deductibles, copayments and coinsurance if you purchased a high-deductible plan,” says David Cusano, a senior research fellow at Georgetown University’s Center on Health Insurance Reforms.
Bernadette Schopfer, director of taxation at the accounting firm Maier Markey & Justic LLP in New York, has seen an increase in the number of people opening health savings accounts as more employers offer high-deductible health insurance plans to their workforce.
HSAs offer a variety of tax advantages depending on your age, income and whether you have individual or family coverage. To qualify, you must be covered under a high-deductible health insurance plan, as defined by the Internal Revenue Service.
Multiple Tax Advantages
Contributions made by a policy holder to a HSA are tax-deductible, and contributions made by an employer are tax-free. Interest accrued in the HSA is also tax-free, and the accounts are “portable,” meaning they stay with you even if you change jobs or leave the workforce.
Individuals can withdraw money from a HSA without paying taxes to cover the cost of qualified medical expenses. But if the money goes toward nonmedical purposes, the amount is subject to income tax and an additional 20 percent tax, according to IRS rules.
Most importantly, unspent funds can remain in a HSA from year to year, unlike flexible spending accounts and health reimbursement accounts that require consumers to spend or lose the money that was set aside each year. Plus, health savings accounts convert to typical individual retirement accounts once you reach retirement age.
"With a health savings account, the money stays with you even if you don’t spend all of it during the year,” Schopfer notes. “There is no pressure to ‘use it or lose it,’ which encourages people to be wasteful and get [health care services] they may not need.”
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