The increasing cost of healthcare insurance is a hot topic on everyone's minds. In an effort to help gain more control over healthcare costs, many employees are choosing to establish a health savings account (HSA).
What is a Health Savings Account?
A health savings account is a financial account specifically for medical expenses that offers a number of tax advantages. This savings account is established by the individual employee, and all funds that are contributed to this account are not subject to federal income tax at the time of deposit. And, unlike flexible spending accounts (FSAs), all contributions made to the health savings account will roll over to the following year if unused.
The funds in the health savings account are strictly to be used to pay for qualified medical expenses and can be used at any time without tax ramifications or penalties. Establishing a health savings account is ideal for employees on high deductible plans as it helps them save for future health-related expenses and allows their money to go further as the contributions are not taxed.
What are the Tax Advantages of a Health Savings Account?
You can think of a health savings account as an IRA on steroids as it offers triple the tax advantages.
First of all, all contributions made to your health savings account are tax deductible. As of 2016, the annual maximum contribution for a health savings account is $3,350 for an individual and $6,750 for a family.
Another benefit with a health savings account is that you're able to accumulate interest and dividends in this account tax-free.
And, as we mentioned, distributions can be made from a health savings account to pay for qualified medical expenses without the tax ramifications.
Can You Use a Health Savings Account for Non-Medical Expenses?
While you can use the funds in your health savings account for non-medical related expenses, if you're under the age of 65, you'll be taxed on the money that you withdraw and will be assessed a 20 percent penalty. If you're 65 years of age or older, you'll be taxed for the withdrawal to pay for non-medical expenses, but will not be assessed a penalty.
The Growing Popularity of Health Savings Accounts
Due to the increasing number of people on high deductible insurance plans, health savings accounts have become a popular vehicle for paying for medical-related expenses.
As of 2013, more than 11.8 million adults had established a health savings account, with the total assets in these accounts exceeding $23.8 billion.
Talking to employees about health savings accounts during employee benefits education can add tremendous value as it can help to minimize the burden of increasing healthcare costs and allow them to better plan for future medical-related expenses.
Please contact us at Summerlin-Roberts to learn more about health savings accounts.