Medical costs continue to rise, but many employees are now presented with a cost-effective alternative in the form of a health savings account (HSA). The balance accrued in these accounts can be used however you wish to cover the costs of qualifying healthcare expenses, and it can even earn tax-free interest over time. These cost saving measures can make it easy for you and your loved ones to receive the great care you need when you need it.
What Is a Health Savings Account?
Health savings accounts are available to taxpayers who are enrolled in high-deductible health plans (HDHP). They were originally created in 2003 to allow these individuals the opportunity to save money that is free from federal income tax for medical expenses. Leftover funds in an HSA roll over year after year and continue to accumulate. Unlike a health reimbursement arrangement (HRA), which is funded by employers, the individual owns their HSA.
HSAs cover a wide range of qualified medical expenses, which are covered in section 213(d) of the IRS Tax Code. These include most medical treatments and procedures, as long as the primary purpose is to prevent or treat a physical or mental ailment, including expenses related to dental and vision care. Funds withdrawn from an HSA that are for non-qualified expenses (such as cosmetic surgery or teeth whitening) are taxed at the patient’s income tax rate plus a 20% penalty for individuals under the age of 65. As of 2011, over-the-counter drugs are not considered a qualified medical expense and therefore cannot be purchased with HSA funds without a prescription.
HSAs Offer Maximum Benefit with Zero Risk
The primary benefit of an HSA is that it gives employees more control over how they spend their healthcare dollars. They provide tax-free earnings and pre-tax payroll contributions. Withdrawals to cover qualified medical expenses are tax-free, and future medical needs are provided for through tax-advantaged savings. There are no penalties for failing to use the full amount, and the additional balance continues to roll over annually. And for employees over the age of 65, there is no excise tax when using HSA funds for non-medical expenses.
Remember, the money belongs to you ─ not your employer. If you change jobs, update your health plan, or choose to retire, the funds remain in your name to use on qualified medical expenses. You can even use your HSA to save for retirement; after 65, it works in much the same way as a 401(k).
Using Your HSA for Investments
Your health savings account dollars can be used for investments ─ like how you would with an IRA; they can even be self-directed. A custodian can offer stocks, bonds, or mutual funds and some institutions offer alternative investments as well. Earnings are free from taxation until you choose to withdraw it, and even then, the funds can still be sheltered under certain circumstances. However, the Internal Revenue Code disallows investments in collectibles and life insurance, but HSA dollars can be invested in assets like real estate and private stocks.