What Is a Health Savings Account and Should I Use One? [Ask Lifehacker]

Dear Lifehacker,
The HR people are telling me I have to decide on my health benefits before the end of the year. Thanks to your article about Flexible Savings Accounts, I understand how FSAs help with healthcare costs, but what about the similar-sounding HSA (Health Savings Account)? What's that all about and is it better than the FSA?

Signed,
Savings Account Seeker

Dear SAS,
Now's the perfect time to be thinking about the Health Savings Account, because as you mentioned, it is open enrollment season. (Exact dates may differ, but, generally, open enrollment is this mid-November to mid-December period.) Most people don't sign up for the HSA, perhaps because HSAs and HSA-compatible health insurance plans can be more confusing than traditional health insurance. But, don't worry, we can help you sort it out and take advantage of an HSA.

Health Savings Accounts: A Way to Get Tax Savings on Medical Expenses

HSAs are savings accounts that you can put money into for medical expenses. As with FSAs, HSAs have tax advantages: you can deduct the amount you contribute to your HSA from your taxes in an "above-the-line" deduction (you don't have to itemize your deductions on your tax return to benefit and the deduction reduces your taxable income) or, depending on your employer's plan, contributions are taken directly from your paycheck before taxes are taken out. Either way, you'll pay less in taxes every year (and everyone likes paying less taxes).

You can check out a HSA savings calculator to see the tax advantages for yourself. As an example, if you contribute $3,000 a year to the HSA and have a federal tax rate of 15% and state tax rate of 10%, you can save $750 a year using an HSA, thanks to the reduced taxes. Increase your contribution to $5,800 and you save $1,450 on your tax bill.

There are several other advantages to an HSA:

• Any money in your HSA you don't use stays in the account and can earn interest every year tax-free. This is unlike the "use it or lose it" policy of FSAs. Depending on the type of HSA, you'll be able to invest your HSA money in a regular savings account, money market funds, CDs or mutual funds.
• You can take your HSA with you when you switch jobs; the account belongs to you, not your employer.
• Your employer can make contributions to the HSA on your behalf. Free money!
• You can use an HSA as a kind of retirement plan: Once you've reached the age of 65, you can withdraw money from the HSA without penalty for non-medical expenses. From the time you open the HSA to when you retire, interest is compounding in your account. (If you take the money out before age 65 for anything other than a qualified medical expense, you'll be hit with a 20% tax penalty, unless you're disabled. So don't think about it.)

Sounds great, right? Well, here's the catch:

What you need to be eligible for an HSA: A high deductible health plan: To qualify for an HSA, you must have a specific type of health insurance: a high deductible health plan (HDHP) and, generally, no other health coverage.

The high deductible health plan is sometimes what scares people away from HSAs. As the name implies, there's a higher yearly deductible than typical health plans?at least $1,200 for individual coverage and $2,400 for family coverage (the deductible is determined by individual health plan, Aetna, for example, but the IRS set those minimums). The deductible means you have to cover a certain amount of your health care expenses out-of-pocket before the HDHP reimburses you. The insurance premiums for your HDHP don't count (although payments for separate long-term care insurance do count towards the deductible).

What counts towards the deductible and qualified medical expenses: A great many types of medical expenses can be paid for with the HSA, including: Dental services, prescriptions, eyeglasses and LASIK, and doctor office visits. The IRS's Publication 502 has a comprehensive list of medical and dental expenses that may qualify.

Another advantage of an HSA: You can also use the HSA to pay for qualified medical expenses for your spouse or a dependent, without tax penalty.

Why Choose an HSA over an FSA

We've already talked about some differences between the HSA and an FSA (yearly rollover, transfer to another job, etc.). (You could have both types of accounts, but only in certain situations, such as if your employer offers a very limited kind of FSA then you can have the HSA.) The biggest difference is that the money in the account earns interest and is yours to use forever for medical expenses or, after you're 65 years old, anything else.

One big difference when it comes to HSA is the premiums. High deductible health plans generally have lower premiums, as much as 50-60% lower than traditional plans. One HDHP I looked at, for example, on my husband's benefits options has a $69.55 bi-weekly deductible, whereas the traditional plan we were using before has a $86.95 bi-weekly deductible, which comes out to roughly $400/year saved with the HSA. However, there are other health insurance plan options that go as high as $258.80 (in my personal example), which is a difference of about $4,542 a year in premium savings.

Using your HSA is easy. Usually, you'll get a debit card or checkbook to pay for expenses, without having to get approval from the HSA administrator.

Finally, many plans have what's called a "premium pass through," where a portion of your HDHC premiums are automatically contributed to the HSA. So, unlike traditional health plans where all of your premium is just insurance and doesn't really add up, with the pass through, at least part of your health insurance premiums are going to your savings.

Why You Might Not Want a HSA

HSAs so far sound like the best option, right? There are, however, a few things that might make you reconsider:

• You have to pay for expenses until all of the deductible is met, which means if you have a major medical expense at the beginning of the year (before your HSA contributions and pass through are deposited), you won't get reimbursed until much later in the year. With an FSA, you can get reimbursed whenever, even in January before all your FSA contributions have accumulated.
• There's also a limit to the amount you can contribute each year to the HSA. For 2011, this is $3,050 for individual coverage or $6,150 for family coverage. For individual coverage, you can typically put away more (up to $5,000) in the FSA.
• Lifehacker reader dilbert69 also noted in the FSA article that HSA funds might be subject to state income tax (e.g., in California), so you should also take that added expense into consideration.

Those are the basics of HSAs. For more information, check out the HSA Manager FAQs or IRS Publication 969 for the official word. Also be sure to compare HDHC plan benefits with traditional health insurance benefits to make sure which meets your needs best.

Good luck!

Love,
Lifehacker

Photo remixed from an original by zimmytws / Shutterstock.

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Source: http://feeds.gawker.com/~r/lifehacker/full/~3/qH20yQKL1XA/what-is-a-health-savings-account-and-should-i-use-one

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