The leaves are changing from dark green to orange and yellows, the temperatures are lowering, all I’ve been seeing on Facebook is back to school pictures…it’s that time of year. I’m not talking about football season, it’s… time… for…open enrollment!
That time of year where you look at all of your benefits, and stare at all the options and confusing language wondering what you should do as you only get to make this decision once a year. I just received an email that our open enrollment meeting is coming up, so without further ado let’s talk about some benefits.
If you didn’t see my post on the Roth401k and you’re a young worker you should check it out.
What’s a Health Savings Account?
Today we will be focusing on the HSA (Health Savings Account) as there seems to be a lot of confusion on them. In short, it is a savings account for medical expenses and many employers are offering this as an option as a part of medical insurance and will even contribute to your HSA if you decide to take part in it.
HSA vs FSA
HSA is not to be confused with an FSA (Flexible Spending Account). An FSA is also a type of savings account for medical expenses. The main difference between an FSA and HSA is that an FSA is a “use it or lose it” type of account where as an HSA can be long term savings account. There are different rules for the two, including the contribution limits and rules for who can contribute.
Rules for the HSA
A part of being able to participate in an HSA is that you have to be on a high deductible plan. A high deductible health plan usually has lower premiums – you pay less up front for the cost of the insurance – but you pay more toward healthcare costs (your deductible) before the insurance company starts paying. A plan is considered a high deductible plan by the IRS if the deductible is at least $1,300 for an individual or $2,600 for a family; also the out of pocket max can’t be more than $6,500 for an individual or $13,100 for a family.
The advantage to signing up for a high deductible plan and taking part in an HSA is that, unlike the FSA, the funds in the HSA don’t reset at the end of the year; they can continue to roll over from year to year and you can invest the contributions so that you earn interest on them just like a 401(k) or IRA.
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Another draw to contributing to an HSA is triple tax savings – contributions, interest and distributions can all be tax free. When you contribute to an HSA the amount that is contributed can be excluded from your gross pay, lowering the amount of taxes you pay up front. If you choose to invest your contributions the earnings can grow tax free. Once you decide to use the money, as long as the distributions are used on qualified medical expenses it will also not be taxed. Also, an HSA is portable, if you chose to change employers the account remains in your name.
The current contribution limits to an HSA is $3,400 for individuals and $6,750 if you are enrolled in a family high deductible plan. You, your employer or both can contribute to the HSA. If your employer does offer a contribution amount the contribution limits are for the total amount that is contributed; so if you are enrolled in a family plan and your employer contributes $2,000 you could contribute $4,750 for a total an annual contribution of $6,750.
As mentioned above, any distributions from the HSA are not taxable as long as it is spent on qualified medical expense. Qualified medical expenses include, “expenses that generally would qualify for the medical and dental expenses deduction”.
For tax purposes, if you were ever audited you must keep records of the medical expenses you used on distributions. Records should show: “the distributions were exclusively to pay or reimburse qualified medical expenses, the qualified medical expenses hadn’t been previously paid or reimbursed from another source, and the medical expenses hadn’t been taken as an itemized deduction in any year”. You are not required to turn in your receipts with your tax return but must keep them with your tax records.
Who Should have an HSA
I was sitting next to an older physician last year at our open enrollment meeting and he was complaining that it seemed like too much work and that he didn’t want to keep records of all his medical expenses. He was semi-retired and didn’t have many years to allow him to earn interest; however the minimal record keeping required is a small price to pay if you can earn interest on the money for years.
To the dismay of many the main cost in retirement is not going to Carnival Cruises, its medical costs. You’ll have to spend a large portion of your savings on medical costs so why not start saving for this early.
If you are young and healthy and have many years before you retire an HSA is a great option for you. A lot of people don’t want to participate in a high deductible plan because much of your medical expenses are not covered. If you’re healthy and not going to the doctor often you can typically save by spending less on the premiums. Also, if you’re young you can invest your contributions and earn interest.
Even for older employees the HSA can be a great option because of the tax savings. They won’t have the same benefit of allowing the account to grow over time but they can still save by lowering their taxes after contributions.
Don’t look at the HSA as a medical expense account, think of it as an alternative retirement account. Due to the triple tax advantage and ability to roll over from year to year it is a great option to save. If your employer offers this option you should check it out and talk to your benefits person to see if it right for you.
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