Americans are facing a deadly combination of financial obstacles that do not appear to be easing anytime soon. Many people are significantly unprepared for retirement, while healthcare costs continue to rise and pressure household budgets. The Affordable Care Act has been touted as a way to relieve some of this financial stress, but it may also help people realize the benefits of health savings accounts.
Although they were created a decade ago by the Treasury Department, health savings accounts (HSAs) might be the most overlooked aspect of healthcare and financial planning. HSAs are tax-advantaged savings accounts specifically used to pay for qualified healthcare expenses. They are essentially available to everyone who has a qualified high-deductible health plan but no other main health plan, is not enrolled in Medicare, and cannot be claimed as a dependent on someone else’s tax return.
There are several notable benefits with HSAs. Individuals can claim a tax deduction on contributions made by him or her or someone other than employers, even if deductions are not itemized on Form 1040. Similar to some retirement accounts, interest or other earnings within HSAs grow tax-free. Your employer may contribute to the account, but HSAs belong to individuals, so they stay with you if you change employers or leave the workforce, and any remaining balance can be carried over to the following year. You can even invest your HSA funds in stocks and bonds if you wish to do so. If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse’s HSA after your death.
“HSAs are not a use-it-or-lose-it type of situation,” said Steve Christenson, executive vice president at Ascensus, in a phone interview. “For example, in 2013 I had a high-deductible health plan and an accompanying HSA. I made contributions to the HSA but didn’t go to the doctor. I put in $5,000 under family coverage and that money is still available in 2014, it carries over. So what we’re starting to see is once people get over that certain level of satisfying a major deductible, the HSA becomes a savings tool for the longer term.”
What qualifies as a high-deductible health plan? In order for individuals to take advantage of HSAs, you need a plan that has a minimum annual deductible of $1,250 and a maximum annual deductible of $6,350. For family coverage, the minimum is $2,500 while the maximum is $12,700. Since the bronze and silver plans offered on the new healthcare exchanges generally come with higher deductibles satisfying these requirements, more Americans than ever stand to benefit from considering a HSA.
Americans should view HSAs in the same manner as retirement accounts. You need to make regular contributions so the money is there when you need it. Having a high-deductible health plan allows people to save on their monthly premiums, but those savings need to be placed aside for future medical needs. For tax year 2014, individuals can contribute a maximum of $3,300, while families can contribute up to $6,550. Furthermore, people age 55 or older can contribute an additional $1,000, which means some families can contribute up to $8,550 this tax year.
There are some disadvantages with HSAs. While these accounts can be used for medical expenses such as doctor visits and prescriptions, HSAs cannot be used on over-the-counter medicine unless you obtain a prescription or if it’s for insulin. This is a new requirement courtesy of the Affordable Care Act. The penalty for using HSA funds on non-qualified medical expenses has also increased from 10 percent to 20 percent. In most cases, HSAs cannot be used to pay monthly insurance premiums.
At the end of 2013, HSAs have grown to an estimated $19.3 billion in assets and 10.7 million accounts, according to the latest survey from Devenir, an independent investment advisor in the HSA industry. This represents a year-over-year increase of 25 percent for assets, and 30 percent for accounts. Last year, people were able to open HSAs at more than 2,200 banks and credit unions. “With the Affordable Care Act, I think the HSAs will continue to grow but at a faster rate,” said Christenson. He also notes that the average HSA balance is up 10 percent year-over-year to about $2,300.
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