Q. Thanks to the Affordable Care Act, I now have a high deductible plan since it was the only plan offered with premiums I could afford. My insurance company is sending information encouraging me to open a Health Savings Account. I’ve heard of these but have never paid any attention to them because I knew I wasn’t eligible with a low deductible plan. Would you recommend establishing and funding this type of account?
A. Yes, I would and once you understand the benefits of the plan I’m sure you will agree. High Deductible Health Plans combined with Health Savings Accounts make a lot of sense in most situations. The HSA accounts allow for a deductible contribution up to a maximum contribution limit, tax-free growth and tax-free withdrawals for qualified medical expenses. You must be younger than 65 to open and invest in an account. You also must have a qualified health plan that can be either through your employer or owned individually.
To qualify in 2015, an HDHP must have a deductible of $1,300 or more for an individual and $2,600 or more for a family. The maximum out-of-pocket limit is $6,450 for an individual and $12,900 for a family. Out-of-pocket expenses include deductibles, co-payments, and other amounts (not including premiums) that are paid for coverage under the plan. As of Jan. 1, 2012, over-the-counter medications (except insulin) are no longer a covered expense without a doctor’s prescription.
Annual contributions to HSAs are not limited to 100 percent of the deductible. The maximum contribution limits for 2015 are $3,350 for an individual plan and $6,650 for a family plan. HSA holders age 55 and older can make additional contributions of $1,000. The contributions can be made by any combination of employer and individual. Contributions made by an employer are excluded from the employee’s income. Individual contributions are deductible even for taxpayers who do not itemize deductions.
Qualified/tax-free withdrawals can be made for a wide range of medical expenses including: payments to doctors, dentists and hospitals; artificial limbs; drugs; eyeglasses and contacts; chiropractic; laboratory work; nursing home costs; physical therapy; X-rays and nursing home insurance premiums.
A HSA holder who uses the money for nonqualified health related expenses will pay tax on the withdrawal, and if younger than 65, a 20 percent penalty will apply. After age 65, a withdrawal for a nonqualified purpose will be taxed but the 20 percent penalty won’t apply. If you become totally and permanently disabled or die, withdrawals are penalty-free. Withdrawals to pay medical insurance premiums are not qualified, with the exception of Medicare premiums.
Any unspent funds in a HSA are allowed to remain in the plan for future years. HSA funds can be invested as the account holder sees fit, except they may not be invested in life insurance. The funds are held in a trust administered by a bank, insurance company, brokerage or other approved administrator. You do not have to use the HSA administrator recommended by your insurance carrier. As you shop for a HSA, compare set-up costs, maintenance fees, debit card fees, checking fees, overdraft fees and investment options.
Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624