Pros and Cons of HSA

Jodee Redmond
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A medical exam may be covered by an HSA plan.

The pros and cons of HSA ( Health Savings Account) should be considered in detail before opening a plan. An HSA is a type of savings plan where the money deposited is held in the account and used towards future health care expenses. This health insurance option has been available to the public since January 1, 2004. An HSA is available to people who are under the age of 65 (seniors are entitled to Medicare benefits) who are not being claimed as a dependent on some else's income tax forms.

How an HSA Works

A person who is a member of a high deductible health plan deposits funds into the HSA. (An employer can make deposits on behalf of employees as well.) These funds are to be used to pay for medical expenses. In order to contribute to an HSA, you must have an income.

The money can be used in the same year it is deposited or left on deposit to be used for future medical expenses. The IRS is responsible for establishing which medical expenses are allowable.

Examples of eligible expenses include:

  • X-rays
  • Prescription and over-the-counter Drugs
  • Contact lenses and eyeglasses
  • Ambulance
  • Drug or alcohol addiction treatment
  • Nursing care
  • Wheelchair
  • Therapy treatments
  • Anesthesia
  • Laboratory tests

In addition, the money in the HSA can be used to pay fees for the following medical professionals:

  • Doctor
  • Dentist
  • Optician
  • Midwife
  • Ophthalmologist
  • Psychiatrist/Psychologist/Psychoanalyst
  • Chiropractor

Annual Deductibles

The annual deductible for 2008 for an individual with an HSA is $1,100. For a family, the deductible rises to $2,200.

Contribution Limits

The maximum amount you can contribute to an HSA is set by the federal government each year. For 2008, the limit is $2,900 for an individual and $5,800 for a family. Individuals who are 55 years of age or older are able to contribute up to $3,800 to their HSA. This amount rises by $100 to $3,900 for 2009.

Out-of-Pocket Expense Limits

For an individual, the out-of-pocket maximum is $5,600. For a family, the maximum amount doubles to $11,200.

Convenience

When you want to pay for medical care, you can access the funds in your HSA with a debit card.

The Pros and Cons of HSA

Here is a list of the pros and cons of HSA:

Pros

  • A HSA costs less than a standard health care plan, since it has a higher deductible.
  • You choose the trustee for your HSA (a bank or other IRS-approved financial institution).
  • The funds deposited in the HSA are tax deductible.
  • The money inside the HSA grows and collects interest tax-free.
  • The HSA is owned by the individual and he or she chooses how to invest the funds.
  • No tax is payable on funds withdrawn from the HSA to pay for medical expenses.
  • You can consult with the medical practitioner of your choice.
  • After age 65, you can withdraw the funds to pay for non-medical expenses.

Cons

  • If you withdraw funds from the HSA for any purpose other than for approved medical expenses, you will have to pay income tax on the amount withdrawn.
  • In addition to income tax paid on withdrawals for non-medical expenses, you will be charged a penalty equal to 10 percent of the amount withdrawn.
  • Although you can withdraw the funds for non-medical expenses after your 65th birthday, you will be required to pay income tax on the amount you withdraw.

This method of paying for health care makes sense for many people. However, you should consider all the pros and cons of HSA before you start your own plan.

Pros and Cons of HSA