Monday, January 10, 2011

What are the benefits of an HSA?

A tax-exempt Health Savings Account (HSA) may be one of the best ways to protect individuals and small business owners from rising health care costs. If you are employed, self-employed or otherwise, you can invest in a tax-advantaged medical savings account if you have a high deductible health insurance plan (HDHP) of $1,200 or more.

The benefit for employees is also lower premiums and more control over what you spend on qualified health expenses. The new health care reform bill has made some changes to HSAs starting in 2011. The money you save each year can no longer be used to buy routine medical items like over-the-counter medications and other medical-related things like contact cleaning solution. It has to be used for prescriptions and insulin. Much like an IRA, if the money withdrawn from an HSA is used for anything other than a qualified medical expense, the money withdrawn is now subject to a penalty in addition to paying the applicable income taxes. The penalty changes from 10 percent to 20 percent in 2011.

The money you contribute to an HSA has triple tax advantages. The contributions are pre-tax, any interest earned is tax exempt and withdrawals are tax-free as long as the money is spent on qualified medical expenses. Individuals can make contributions even if they don’t itemize their tax deductions and employer contributions are not counted as income.

Another benefit of the HSA is that individuals who remain healthy and don’t have to pay any medical expenses can grow the money in their account from year to year. Over time, HSA contributions of more than $10,000 can be directed to long-term investments like mutual funds to maximize the value of the HSA.

For 2010 and 2011, the maximum can you can contribute to a Health Savings Account is a $3,050 for individuals with self-only coverage and $6,150 for individuals with family coverage.. The IRS allows individuals over the age of 55 to make a “catch up” contribution of an additional $1,000 for single and family plans.

HSAs are typically managed by banks, credit unions, or insurers. An employer can also set up an HSA for employees. It pays to shop around to see what various institutions offer and what they charge to administer an HSA account. Some banks offer higher interest rates, but charge fees for every transaction you make Fees can eat up any money earned in interest. They may also require you to make a minimum contribution each month to avoid additional fees. Some other fees to watch out for are charges for setting up an account, checks, online bill payment and check cards.

When determining an administrator, make sure the financial institution is FDIC-insured. It is the individual's responsibility to keep track of deposits and expenditures. From time to time, questions may arise about an account, so it may be helpful to deal with an institution that’s close to where the individual lives live or works like a community bank. PyraMax Bank offers one of the most competitive HSAs in the country.

An HSA is something the individual owns. Whatever money is invested stays with you no matter where you work or which insurance company insures your company. You can grow the money and after age 65, use the contributions to pay for Medicare premiums. At age 65, you can also use the money to pay for things other than medical expenses. Any money withdrawn is considered taxable income, but you are not subject to any penalties.

Proponents of HSAs say this form of savings for medical expenses makes people wiser consumers, because they have the freedom and flexibility to make your their own health care choices. Individuals can spend the money or save it. It’s the consumer's choice.