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What You Should Know About Health Savings Accounts (HSAs)

In order to manage costs more effectively, more and more companies are moving from traditional health benefit plans to defined contribution health plans and high deductible health plans (HDHP). As a result, more people are realizing the benefit of HSAs as an innovative savings tool to pay for medical expenses. However, there are a few important aspects of HSAs that are important for you to know:

Your HSA pre-tax contributions grow and roll-over each year.

Families and individuals who have high-deductible health insurance plans can set aside pre-tax money into an HSA to use for qualified medical expenses. HSAs offer two advantages over flexible spending accounts (FSAs). 1) Unused funds grow and roll tax-deferred, each year so it remains available to account holders to use for future medical expenses. 2) An additional benefit is that HSA owners can keep their accounts even when they switch jobs.

There are several ways you can contribute to your HSA.

Employees, and sometimes their employers, contribute to the HSA in several ways. Often, employees can set up a direct deposit from their paycheck into their HSA account. An employer may contribute on that same schedule or a different schedule, or choose to not contribute at all. Owners of HSAs can also make contributions at other times of the year if they wish using an HSA Contribution form. The good news is that for 2014, total contributions allowed to be deposited to HSA accounts have increased from 2013 and can reach $3,300, up $50 for self-coverage; and $6,550, up $100 for family coverage.  Employees aged 55 and over can continue to contribute an additional $1,000 no matter if they are covering just themselves or their family. 

HSAs provide convenience and flexibility.

HDHPs are a convenient and flexible way that individuals and families can manage their health care costs with often lower premiums relative to traditional health plans, plus offer a variety of ways to make tax-advantaged contributions to your HSA. Most HSA accounts offer access to your funds via debit cards, checks, cash (withdrawn at an ATM), or by making online bill payments.  It should be noted that HSAs are not permitted to be overdrawn; an overdrawn HSA may lose its special tax and benefit status.

Additionally, HSAs may be used as retirement plans if you do not utilize all your contributions to pay for qualified health-related expenses. You can even roll IRA funds into your Health Account if you choose.

What you need to know about HDHP rules and requirements.

HSA holders are responsible for ensuring that amounts deposited to an HSA do not exceed contribution limits. Most HSA issuers will provide monthly statements or online banking access to help you track account activity. HSA holders should retain all provider receipts and deposit details (or re-deposits, in the case of a payment adjustment) for tax records. The IRS requires HSA holders to report contributions and distributions on income tax returns. Employers must report contributions to employee accounts on a business tax return, as well as on employees’ Form W-2.

What qualifies as a high-deductible health insurance plan in 2014? Each year, the IRS sets limits for what qualifies as such a plan. For 2014, plans with a deductible of at least $1,250 for self-coverage and $2,500 for family coverage and maximum out of pocket expenses of up to $6,350 for self-coverage and $12,700 for family coverage qualify as high deductible health insurance plans.  These are slight increases from 2013. 

No major legislation has been announced that changes other rules around HSAs other than some of the limits noted here. As a reminder, though, since 2011, as a part of the healthcare reform law (passed by Congress in 2010), consumers no longer can pay for over-the-counter medications with HSA (nor with FSA) funds unless they are prescribed by a physician. However, funds can still be used to pay for premiums, prescription drugs, and other qualified medical expenses. 

Another aspect that hasn’t changed since 2011 is that there is a tax penalty of 20 percent for using money in an HSA for non-medical expenses before age 65. Also the same from 2011 is that all insurance policies (including high-deductible ones) must provide certain preventive care services without cost-sharing.

While other changes may take place in 2014, HSA-eligible policies will still be available to all qualifying families and individuals. Note that if you have other health insurance, are on Medicare, or are a dependent on someone else’s tax return, you do not qualify to open an HSA account.

This is a great time to sign up for your HSA, but when shopping for an HSA, be aware that not all are the same and may vary from institution to institution.  Personal attention and knowledgeable people available to answer your questions are equally important factors to consider. Also, evaluate the conveniences, monthly fees and balance requirements versus the way you like to bank and your likely balances.  Some financial institutions, such as Simsbury Bank, provide complete HSA products, including higher-interest rate HSA CDs for funds you don’t anticipate needing soon, plus all of the required IRS reporting, and, most importantly, the advice to help guide you through the IRS rules around these accounts so you can make the most of your HSA.   

HSA rules and benefits will change as the healthcare landscape continues to change. If you are considering a high deductible health plan and HSA, a good step is to visit your community bank to set up an HSA account that will help you manage your healthcare costs and save in a tax-advantaged way.

This statement is intended to provide only a summary of the rules and regulations that apply to Health Savings Accounts (HSAs). It is intended to be informational and does not constitute tax or legal advice regarding any specific situation. For more information or tax advice, please contact your tax advisor.

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