Health Savings Account (HSA): Potential Advantages and Disadvantages
A health savings account (HSA), is a medical savings account available to individuals in the U.S. covered under a high-deductible health plan (HDHP).
This tax-advantaged account, allows taxpayers to save for medical expenses that HDHPs do not cover. HSAs, providing people with a way to control health care costs, are similar to personal savings accounts, but the accumulated funds can be used to pay for medical expenses.
The account is owned and controlled by the taxpayer, and not by the employer or insurance company.
Contributions are limited to a certain amount each year. For instance, the maximum amount for 2016 was $3,350 for individuals and $6,750 for families, and an additional $1,000 catch-up contribution can be added if you are over 55.
In order to decide whether HSA is right for you, several things have to be taken into consideration. If you have no health issues and want to make savings to cover future health care costs, or if you are near retirement, an HSA may be a good choice.
In contrast, if it’s probably you will need an expensive medical care in the near future and it will be hard for you to meet an HDHP, an HSA won’t be considered the best choice.
Below I outlined the advantages and disadvantages of health savings account.
- The decision concerning the amount set aside for medical expenses is made by you.
- Spend your HSA money as you wish. Choose the health care based on quality and cost.
- Despite the fact that your employer may contribute to your HSA, you are the owner of the savings account and the amounts deposited in it, even in the case of changing jobs.
- Any unused amounts at the end of each year are rolled over to the next year.
- Deposits made to the HSA are not taxed.
- As health problems are unpredictable, it is difficult to plan an accurate budget for medical expenses.
- Information concerning the cost and quality of healthcare can be hard to find.
- There are people who find it difficult to set aside money for contributing to their HSAs. Older individuals and the ones with health problems may not be able to save as much as younger, healthier people.
- You may choose to avoid medical care when you need it, in order to save money in your HSA.
- Taxes are paid on the amount withdrawn from the HSA for non-medical expenses.
The health savings account can be passed on to the account holder’s spouse in case his/her death, and the beneficiary can use it for qualified health care expenses. However, the account loses its HSA status and its fair value becomes taxable in the year of death for non-spouse survivors.
Though Health Savings Accounts are becoming common in the workplace (18.2 million HSAs as of June 30), few people are allowing their funds to grow.
According to the Devenir, in the first six months of 2016, $16.7 billion went into HSAs, and holders withdrew $11.8 billion.
As many advisors believe, it is beneficial to wait and not spend the amount in the account.
According to Jeffrey Levine, a chief retirement strategist at Ed Slott & Co., if you let the money grow, you would get the deduction for the contributions, taxes on growth would be deferred, and withdrawals are tax-free at a time when you’re likely to incur medical expenses at a greater frequency.