HSAs are otherwise known as Health Savings Accounts. It acts more like a personal savings account but can only be used by an individual seeking healthcare services. These accounts are hardly a new concept to many people as they have been around since IRS approved it in 2003. The account is interest-bearing and tax-favored, allowing an individual to utilize the funds in real-time or future.
The primary purpose of HSA is to allow individuals with high insurance deductibles to set aside money to pay for medical expenses. The beauty of HSA is that the monetary contribution made is pre-tax dollars. In short, if you have HSA, it means that you most likely have a high deductible health plan. The medical expenses covered under HSAs can include dental treatments, prescriptions, doctor visits, and sometimes surgical procedures. A person owning this account is allowed to make a yearly contribution. The contribution should not exceed the government-mandated contribution limits.
Despite all this, ownership of a Health Savings Account is just not open to any individual. A person is considered eligible if they meet some requirements. These include;
- An individual must not be enrolled in Medicare.
- Must not be covered in any other person’s health plan, e.g., spouse’s health plan.
- Must be enrolled in an HDHP (high-deductible health plan).
- Must not be claimed as someone’s else’s tax dependent
The article below aims to give you detailed information about HSAs benefits and disadvantages. Keep reading to learn more.
Pros of HSAS
1. HSAs can be funded in multiple ways: Contributions can come from you, your employer, a relative, or anyone else who wants to add to your HSAs. Despite this, all contributions made should not exceed the limit set by IRS.
2. Pre-tax contributions: Your contributions are made with pre-tax dollars done through payroll deductions with your employer. Therefore, your contributions are not subject to federal or state income taxes as they are not included in your gross income.
3. Tax-free withdrawals: Withdrawals from your HSAs account are not subject to taxes when used for qualified medical expenses.
4. Tax-free earnings: The beauty of an HSAs account is that any interest or other earnings on the money saved is tax-free.
5. HSAS allows for portability of fund: The money saved in your HSAs account will remain available to you for future qualified medical expenses even when you make changes. Such changes may include; changing your health insurance plan, an employer, or retirement.
6. It offers flexibility after the age of 65 by boosting retirement funds: HSAs contributions can also be considered retirement savings. After the age of 65, you can use your saved funds for other expenses apart from medical expenses without paying any penalty. Note that such spending will be considered taxable income.
7. Easy access to funds: The health account is convenient because it issues debit cards to make prescription medicines payments with and other eligible or qualified health expenses. Anyone who wants a receipt of their medical bills can contact a billing company and pay using the card. It is also convenient because any qualified expenses paid for using out-of-pocket money can quickly be reimbursed using the card.
8. Annual Rollover: Any money or balance left in your account at the end of a year will be rolled over to the following year.
9. Many expenses are covered under HSAS: HSAs expenses include many healthcare expenses that your regular insurance plan may not cover.
10. No initial deposit: Luckily, there is no initial deposit required to open an account as HSAs are portable, and you can change the trustees once every twelve months.
Cons of HSAS
1. Taxes and penalties: If the owner of an HSA account withdraws money before reaching the age of 65, they will owe income taxes on the withdrawn cash plus a 20% penalty. If the owner is above 65years, they will owe taxable income costs but not the penalty.
Penalties may also apply to an individual who does stop contributing to the HSAs six months before applying for social security benefits.
2. It might not cover unexpected expenses: You might have unexpected healthcare costs that exceed the amount saved in your HSA account, thus making treatment services difficult.
3. High-deductible requirements: To qualify for an HSA account, you need to have a high-deductible health plan. Such a requirement can put a more significant financial burden on a person when compared to other insurance covers. It is because it will result in high out-of-pocket costs.
4. Not everyone is eligible for a HAS: Any person covered by a spouse’s plan will only take an HSAs advantage if the spouse’s plan is compatible with HSA. If not, it is considered legally unlawful to make contributions to such an account. People claimed as dependents of another person’s tax return and those enrolled in Medicare are considered not eligible.
5. Pressure to save: An HSA account comes with the pressure of wanting to save. It may become a problem as some people may be reluctant to seek healthcare services when sick. All this because of not wanting to spend the money in their HSA account, believing they may need it sometime in the future.
6. Limitations after age 65: Once you attain 65 years old, you automatically become eligible for Medicare. It means that you will no longer be eligible to invest your funds into an HSAs account as Medicare is not considered a high deductible plan. Despite not being allowed to contribute to your account, you can still withdraw existing funds from the account to cover medical expenses.
7. Recordkeeping: Any owner of an HSA account has to keep receipts to prove that their withdrawals were used for qualified health expenses. Most times, when the IRS does an audit report, such receipts will be required.
8. Some places do not accept HSA cards: Some stores and merchants do not accept HSA cards in such cases. You will have to seek a reimbursement from your HSA trustee after paying the services with your own money.
9. Fees: Some HSAS charge a per-transaction fee or a monthly maintenance fee. These fees vary by institution and may be waived if you maintain a certain minimum balance.
