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Written by Thomas M. Geier, CPA, CFP®, PFS

health savings accountIt is that time of year again, when most employees engage in their annual sign up program for health insurance with their employer. Because health care costs have risen and many providers have left the market in certain areas of the country, both large and small companies have begun to offer high deductible health plans (HDHP’s) as an option to employees. These plans have become popular because, although they require that the employee pay more towards their health insurance through their deductible, they have significantly lower monthly premiums. Many families are betting that they can save substantially on their total medical outlays for the year, as long as they stay relatively healthy.

How Does a High Deductible Savings Plan & HSA Work?

These “high deductible” plans usually come linked with a Health Savings Account (HSA) which make potential medical expense savings even more enticing through tax benefits. Congress authorized Health Savings Accounts back in 2003. They were set up to help people with the growing costs of health insurance through income tax concessions. The HSA’s work somewhat like an IRA or 401k, where money is placed into an account set up with a custodian, and the amount contributed is deducted from the employee’s gross income on their tax return. The employee, therefore, pays less in taxes for the year. Most employer provided HSA’s have automatic payroll deductions, but if not, the employee can make the contribution on their own.

For 2016, people can contribute up to $3,350 if they have a single coverage HDHP or $6,750 for family coverage. Once the money is placed into the HSA account, it can be withdrawn tax free if used for qualified medical expenses. These expenses, for the most part, are those that qualify for the medical and dental expense deduction on Schedule A of the 1040 Income Tax Return form. However, non-prescription medicines, besides insulin, are not covered.

It is important to keep good records of the expenses paid by funds withdrawn from the HSA. If the IRS determines that you made a withdrawal for an unqualified expense, you may be subject to a 20% penalty on the amount.

Excess contributions can be carried forward into future years, in other words, the account does not “expire”. This means that if you do not incur many medical expenses, you can allow the funds in the account to grow and be available for medical expenses during retirement. Most HSA custodians offer investment options on funds that you plan to set aside for future years. In fact, after age 65, you can use funds that have grown in your HSA for non-medical expenses. However, you will pay income taxes on the amount withdrawn, but no 20% penalty.

Can You Benefit From a Health Savings Account?

How do you know if you can utilize a Health Savings Account? Most likely, your employer will let you know if your group plan at work offers a high deducible option (HDHP). Otherwise, check out your insurance policy to see if your deductible is at least $1,300 for individual HDHP coverage, or $2,600 for family HDHP coverage for 2016. It is best to contact your insurer to make sure your plan does actually qualify. Also, for those over age 65 but still working, you may not be eligible for an HSA.

Should You Have a HSA Linked Medical Insurance Agreement?

If you have any questions on the pluses and minuses of a HSA linked medical insurance arrangement, feel free to contact us. We can discuss with you the long term advantages of these accounts as well as possible disadvantages that may apply to your situation. Every person has unique medical expense coverage needs. We can help advise you on the best approach for you.

© Geier Asset Management, Inc. October 2016. Thomas M. Geier is a Vice President of Geier Asset Management, Inc., a Registered Investment Advisor. The above blog reflects the opinions of Mr. Geier and not necessarily the firm. Any advice given is general in nature and investors must consider their own individual circumstances. Past performance is no indicator of future performance. The firm makes no warranties or representations of any kind relating to the accuracy or timeliness of the information provided.

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