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The Advantages and Disadvantages of a Health Savings Account

A savings account can be money set aside for a rainy day, a new home or even just a sense of security.  But what is a Health Savings Account? In 2012, individuals are full of questions about health care. For example, what is this new health care reform bill? Who will it impact and how much? Because many of your clients may be educating themselves on health care now more than ever before, many of your clients may also be asking you about Health Savings Accounts.

Health Savings Accounts (HSAs) are specialized accounts that were established in 2003 to aid individuals with high-deductible health plans. An HSA is an account that provides tax incentives when contributions are used for qualified medical expenses. The amount that can be deposited into the account per year is determined by the U.S. Treasury Department. Factors such as the type of high deductible health plan an individual or family has, age and dates of eligibility can help determine the allowable contribution amount per year. Money deposited into the account remains there until it is used or withdrawn, and funds are not required to be distributed each year.

Though permission or authorization from a government entity is not required, there are rules governing who can set up a Health Savings Account. For instance, the individual must be part of a high deductible health plan, have no other health coverage except what is specifically permitted, cannot be enrolled in Medicare and cannot be claimed as a dependent on someone else’s tax return from the previous year.  If all of these qualifications are met, the individual then works with a trustee, such as a bank or insurance company, to set up his or her Health Savings Account.

A savings account sounds great no matter what type it is, right? Well, not necessarily. There are advantages and disadvantages of owning an HSA.

One of the biggest advantages of a Health Savings Account is that the money put into the account is tax-exempt when used for qualified medical expenses. Individuals or even an individual’s employer can contribute to an HSA. An employer’s contribution would not be included as part of an individual’s gross income, nor would the employer be tied to the account, meaning that when an individual leaves a company, the Health Savings Account remains with the individual. If an employer contributes to the account, it is like free money to the employee for qualified medical expenses.  To see a comprehensive list of qualified medical expenses and additional rules and regulations, see IRS Publication 969 and IRS Publication 502.

If the money in an HSA is withdrawn prior to the age of 65 and used for non-qualifying expenses, it would be considered income and a 20% tax penalty would apply. After the age of 65, an individual can withdraw the money in their Health Savings Account to use for non-eligible expenses without paying the 20% tax penalty.

And so begin the disadvantages.

Amongst other specified rules, funds in an individual’s Health Savings Accounts can only be used for qualified medical expenses in order for the money in the account to remain tax exempt. Therefore, if an individual needs the money for any other reason, it is not available to him or her without incurring a monetary penalty. In a tough economic climate, setting money aside for unexpected medical expenses is not always a possibility for some individuals or families. In addition, qualified medical expenses paid for by funds in an individual’s HSA can occur only after the HSA has been established; therefore, the funds cannot be used to pay for medical incidences that occurred prior.

Health Savings Accounts are also associated with high-deductible health plans. Thus, one of the disadvantages of having an HSA is the high deductible. Though some preventative care may be covered by the health insurance carrier without meeting the deductible, individuals will have to pay toward the high deductible for specified medical procedures before the provider (health insurance carrier) will cover some incurred expenses. If the individual does not have enough money in their Health Savings Account to cover a qualified medical expense, the money paid toward the deductible for a qualified medical expense would be out-of-pocket.

Acquiring an HSA is a client’s proactive approach to save for his or her health. We all wish an apple a day would keep the doctor away, but it is impossible to plan for life’s twists and turns. A Health Savings Account is a form of financial preparation. It is like a “rainy day” fund for your client’s health. For clients who are considering acquiring a Health Savings Account, discuss what’s best for his or her health and financial circumstances as well as the advantages and disadvantages of obtaining a Health Savings Account.


U.S. Department of Treasury:  Health Savings Accounts (HSAs)

Department of the Treasury Internal Revenue Service:  Publication 969 Health Savings Accounts and Other Tax-Favored Health Plans

Department of Treasury Internal Revenue Service:  Publication 502 Medical and Dental Expenses (Including the Health Coverage Tax Credit)

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