A Health Savings Account (HSA) is a tax-free savings account used to pay for medical expenses, such as visits to the doctor and prescriptions. The contribution is taken out of the individual’s paycheck pre-tax, and the employer has the option to contribute as well, just like with a 401(k). The account also comes with a number of investment options. Not only can the employer contribute to the HSA, but relatives can as well. An HSA is not only for medical, but dental and vision expenses as well.
Then, once the individual has paid up to their out-of-pocket limit, then the insurance company covers the rest. This is especially vital for someone who requires an expensive emergency procedure.
The advantages of an HSA is that it combines health insurance with a high deductible with a savings account that is tax free. The plan can also help cover the cost of the deductible. Any money that is not spent will remain in the account and earn interest.
The difference between an HSA and a Flexible Spending Account (FSA), is that in an FSA, only a portion of the money leftover is able to be carried over into the next year. All of the money in the HSA that is not spent will remain in the account, tax-free. (Of course, it still may only be used for medical bills to remain free from a tax hit.)
In order to be eligible for an HSA, one must be currently enrolled in a High Deductible Health Plan (HDHP). An HDHP is considered any health insurance plan with a yearly deductible of at least $1,100 for an individual and twice that for a family plan.
The individual may then withdraw their funds once they reach the age 65. Withdrawals before then receive a tax penalty.
One of the great benefits of an HSA is that the individual has the ability to build up their savings for retirement (since these expenses are able to be withdrawn after the contributor reaches age 65). While choosing an HSA can often mean a lot of upfront costs (such as the high deductible), it is a good choice for younger and healthy individuals looking to save on medical expenses for the long term and obtain a lower premium. It also helps to lower taxes, because the contributions are made before tax and therefore the taxable amount of the paycheck is lower.
Changes in 2014
With the implementation of the Affordable Care Act, some changes to the HSA regulations have changed. Money in the HSA can no longer be used to purchase over-the-counter drugs.
The Affordable Care Act also increased the penalty for early withdrawal. The tax percentage for early withdrawal has increased from 10% to 20% in 2014.
It can be difficult for business owners to navigate the world of health insurance. We at Employer Advantage Group are here to help you make the decision that is best for you and your employees. We are familiar with a number of different health plan types (including HSAs and FSAs) and would be happy to speak with you about your options. Contact us today!