One of the options out there for taking care of your medical expenses is a health savings account. A health savings account is not really a new idea, but it is one that is gained a great deal of popularity as of late. Let’s take a look at what an HSA actually is and how it differs from conventional insurance. To decide if you want to go with an HSA you have to know the advantages and disadvantages.
What exactly is a Health Savings Account?
Before we look at the advantages and disadvantages of this plan, we should first understand exactly what an HSA is. A health savings account is like a personal savings account but it is used for healthcare expenses only. The only way that you can have a health savings account, which has a number of tax advantages, is to be enrolled in a high deductible health plan. Let’s start with all the advantages that come with having a health savings account as opposed to choosing a different insurance plan that does not include this feature.
Advantages of an HSA
There are definitely some advantages of health savings accounts. For one thing, many medical expenses apply. There are lots of medical expenses that you can pay with a health savings account. It ranges across mental, medical, and dental health services as well as vision and even into chiropractic care. The specifics of what you can spend your health savings account on will vary from one plant to another and one health insurance company to another, but as a general rule they are not that restrictive.
In addition, other people can contribute to your health savings account. If relatives want to contribute your health savings account they can, and your employer can contribute as part of the health insurance plan that they offer with your job the Internal Revenue Service does set some limits on how much people can contribute, but they are pretty high already.
What’s really great about the contributions to a health savings account is that they can be made with what are called pretax dollars. For example, your employer can take out money from your paycheck to contribute to the health savings account either by contributing themselves or contributing your own money through a prearranged agreement with you and you will only be taxed on what was remaining after the contribution is made.
In addition, if you make contributions on your taxed income then you can deduct that amount from your tax return which will reduce the amount that you owe. You also don’t have to pay taxes on withdrawals that you make from your health savings account as long as it is being used for qualified health expenses. You also get interest on a count and you’ll have to pay taxes on that as well.
Disadvantages of an HSA
Of course, there are also some disadvantages with a health savings account. For one thing, you have to have a health insurance plan with a high deductible before you can even have one. Depending upon how high this deductible is, and what your medical expenses end up being, this can put up serious financial strain on you. Plus, until you meet that deductible, your health insurance isn’t going to be paying anything, so you are not only going to be paying your health insurance premium and contributing to a health savings account, but you are also going to be responsible for medical bills until the deductible has been reached.
Another disadvantage is that there is severe penalties for using the funds in your health savings account for expenses that are not qualified. Sometimes, you can do this completely by accident. You may pay for a medical expense with your HSA and then find out later was on the list of qualified expenses. In addition, you have to keep very strict records when you have a health savings account and you may even have to pay certain fees for keeping one. These fees are not usually very high, and are usually assessed by the banking institution itself. If you maintain a significant balance, then you may not have to pay any fees at all.
The Bottom Line
The bottom line is that having an HSA may work for some people. There are damages and disadvantages to having one. You will have to carefully evaluate both and determine whether this type of insurance plan is going to fit your budget and lifestyle. For some people, a health savings account in a high deductible plan may be the perfect solution.