A health savings account (HSA) is something like a personal savings account, but the money is only intended for qualified health care expenses. Established in 2003 as part of the Medicare Prescription Drug, Improvement and Modernization Act, HSAs allow people with high-deductible health insurance plans to pay for current health care expenses and save for future expenses in a tax favorable manner. The IRS defines an HSA as a “tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur.”  The IRS establishes guidelines each year, based on individual and family coverage. For the calendar year 2018, the IRS set the minimum deductible amounts at $1,350 for self-only plans and $2,700 for family plans. The maximum out-of-pocket costs for individuals is $6,650 while the figure is $13,300 for family pans. Consumers can contribute $3,450 for self only HSA plans in 2018 and $6,900 for families. With the eligibility guidelines out of the way, let’s take a look at some pros and cons about health savings accounts that need to be considered.

PROS

Health Savings Accounts (HSAs) offer a way to save and pay for healthcare expenses.

  • Others can contribute to your HSA. Contributions can come from not only you but your employer or anyone else who wants to add to your account.
  • Contributions are commonly made on a pre-tax basis, which means that they are not subject to federal incomes taxes. Your employer can also make contributions on your behalf, which are then not included in your gross income.
  • Contributions made with after-tax dollars can be deducted from your gross income when filing your tax return.
  • Withdrawals from your HSA are not subject to federal income taxes provided they are used for qualified medical expenses. The IRS sets guidelines as to what is deemed a qualified medical expense here.
  • Any interest or earnings on the assets in the HSA are tax-free.
  • Funds within an HSA rollover on an annual basis, which means they do not expire or have to be used within a certain timeframe.
  • The money within your HSA remains available for future medical expenses even if you change health insurance plans, change employers or retire.
  • Many HSAs now issue a convenient debit card to facilitate easy access to your funds when paying for qualified expenses.

CONS

While there are many advantages to health savings accounts (HSAs), consumers need to be aware of the disadvantages as well.

  • Even though you are likely paying less in monthly premiums with a high-deductible health plan, it can be difficult even with an HSA to come up with the funds to meet a high deductible.
  • Unexpected health care costs can exceed what you had planned for and you may not have enough in your HSA to cover these expenses.
  • There might be pressure to continue to save in your HSA that could cause you to be reluctant to seek healthcare when you need it.
  • Recordkeeping can be very daunting as you will need to keep your receipts to prove withdrawals were used for qualified healthcare expenses.
  • Some HSAs charge a maintenance fee and while these fees are typically not very high, they do eat into your bottom line. Sometimes these fees can be avoided if you maintain a minimum balance.
  • One of the biggest cons of HSAs is taxes and penalties. If you withdraw funds for non-qualified expenses before age 65, you’ll owe not only taxes on the money but also a 20% penalty. After age 65, you will avoid the penalty for a non-qualified withdrawal, but you still owe taxes on any growth.

A health savings account (HSA) can be a great choice for people who are looking to limit their upfront health care costs while saving for future expenses. HSAs are ideal for high-deductible health plans as monthly premiums are usually much lower than a low-deductible health plan. Favorable tax treatment could also factor into why a consumer might be compelled to utilize an HSA. With that in mind, HSAs aren’t ideal for everyone and you should analyze your unique situation before blindly jumping into an account that might not suit your needs. As always, take a close look at everything before making any final decisions.

 

Adam M. Sutton is the founder and president of Cornerstone Financial Partners. Adam is a financial planning professional, specializing in retirement income planning and wealth optimization strategies. He is a Series 66 licensed Investment Advisor Representative (IAR), as well as life, accident & health insurance licensed and is certified to address long-term care. Cornerstone Financial Partners is a privately held, independent financial planning firm.

Full Disclosure: This information does not constitute investment advice. This article is published and provided for informational purposes only. None of the information contained in the article constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. To the extent any of the information contained in this article may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Cornerstone Financial Partners does not provide legal or tax advice, and the contents of this message are not intended to constitute such advice. Please seek an appropriately licensed individual for legal or tax advice in relation to your individual situation.