It's a triple-play savings combination: You get a tax deduction for money going in, tax-deferred compounding of earnings and tax-free withdrawals for money coming out to pay health care expenses. That, in a nutshell, is why you might want to open a health savings account if you're still too young for Medicare.
Eligibility for an HSA is a perk of having a high-deductible health insurance plan. To qualify for the savings account, your health plan must have a deductible of at least $1,200 for an individual or $2,400 for a family. However, your savings account contribution is not limited to the amount of the deductible. Rather, it's based on your age and the type of health plan you have.
The maximum contribution in 2010 is $3,050 if you've got an individual plan and $6,150 if you've got a family plan. If you're 55 or older, you can add an extra $1,000, so a couple may contribute as much as $8,150 combined. Medicare enrollees and people claimed as dependents on someone else's return are not eligible.
Before you rush to sign up, consider two important things: Is a high-deductible health plan the right choice for you and how much money are you able and willing to stash in your HSA?
High-deductible plans are most appealing to healthy people who don't expect to incur a lot of medical expenses. Whether they are a good alternative for others depends on how much lower the premiums are than those offered on traditional plans. Would you come out ahead even if you had to pay the entire deductible out-of-pocket? If not, you'll have to carefully weigh the odds of that happening.
The worst option is to choose the high-deductible plan, get sick and not have the money to pay your medical bills. Because of that, you should think of your health insurance deductible as the minimum amount to put into an HSA. The more money you can stash above that, the more you'll benefit from tax-free compounding of your savings over time.
HSAs are similar to flexible spending accounts that many workers are familiar with through their employers, but they are a substantially better deal. Both allow tax-free withdrawals for health care expenses. But with an HSA, you don't have to submit reimbursement claims to anyone; you hang onto your receipts in case the IRS audits you. And with an HSA, any money left in your account at the end of the year stays there; there is no use-it-or-lose-it provision the way there is with the FSA — the health care flexible spending account. Many HSAs offer both debit cards and checkbooks you can use to pay medical expenses directly or to reimburse yourself. If you've got an HSA, you cannot also have a flexible spending account.
HSAs got off to a slow start after their introduction in 2004, but as high-deductible plans have grown in popularity, so have the accounts. HSAs are available with both employer-provided health plans and with plans that people purchase on their own.
Even if you get your health insurance through an employer plan, you can shop around for your HSA provider, which may pay off nicely. The HSA available to us through my husband's employer had an $8 setup fee, a monthly service charge of $3.50 on balances of $1,000 or less, and paid interest of only 0.1 percent. By shopping around at that time, I found an HSA at Freedom Bank in St. Petersburg that came with no set-up charge and no monthly service charge if you agreed to sign up for electronic statements. It pays 3 percent interest once your balance is at least $1,000.
To start, your HSA should be in a bank account where the money is readily accessible to pay health care expenses. However, once you've accumulated a sizable balance, you might consider mutual fund options available through some providers. For example, Health Savings Administrators of Richmond, Va., offers an HSA with the choice of 22 Vanguard funds. Fees include a $20 setup fee and a $39 annual administrative fee. The HSA at BB&T Bank offers 30 mutual fund options without a sales charge but with a $3 monthly service fee.
My husband contributes to his HSA through payroll deduction, thus avoiding both income tax and Social Security tax on his contributions. I write checks to fund my account and deduct the contributions on our tax return.
If an HSA is in your future, be sure to keep good records of all deposits and withdrawals and receipts for your health care expenses.
For a good source of additional information, Google "IRS Publication 969."
Helen Huntley is former St. Petersburg Times personal finance editor and currently a fee-only financial adviser with Holifield Huntley Financial Advisers in St. Petersburg (holifieldhuntley.com).