In recent years, we’ve seen consumers shouldering more and more responsibility for their own health care spending. Consumer-directed health plans incorporate tools to ease the burden and help individuals make smarter decisions regarding their care. One way is through health savings accounts.
An HSA allows you to pay for current health care expenses not covered by your high-deductible health plan and save for future ones, all on a tax-free basis. The account is funded by the employee, the employer, or both, but the account is owned by the employee. Leftover balances can be rolled over from year to year.
Pairing an HSA with a high-deductible health plan, which generally doesn’t cover the first several thousand dollars of your health care expenses, can be a smart way to go for some. Withdrawals are tax-exempt when used to pay for qualifying medical expenses, and contributions to an HSA reduce your taxable income. Money used to pay for nonqualified expenses, however, is subject to a 20 percent tax penalty. A partial list of qualified medical expenses is available on Publication 502 on the IRS website.
When you set up an HSA, you determine your annual contribution. You can estimate these needs by reviewing your eligible expenses from the previous year and determining how your upcoming expenses may differ from the previous year. A variety of other rules apply, but money not used during the year rolls over to the next year and can earn interest tax-free.
You can also place your unused funds in a longer-term investment through the bank that administers your HSA.
You can contribute money directly, through deductions from your tax return, or via withdrawals from your 401K or other retirement plan. Employer contributions are not subjected to payroll taxes.
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