Daily Deduction: Health Spending Accounts

Sound too good to be true? Like every great tax benefit, HSAs come with a catch. They are only available to people who are covered by high-deductible medical insurance. This is less than ideal because a high-deductible plan requires you to cover more out-of-pocket expenses than a conventional plan would. In other words, you have to take a real financial risk in order to get the tax reward. If you are single, a high-deductible plan is one that has an annual deductible of at least $1,100. For a family, the annual deductible must be at least $2,200. These plans can require you to cover out-of-pocket expenses of up to $5,600 for a single person and $11,200 for a family. Your employer will know whether your plan qualifies and whether you are eligible to open an HSA.

Other restrictions apply. In addition to the high deductible plan requirement, contributions to an HSA are limited. In 2008, a single person could contribute up to $2,900, and a family could contribute up to $5,800. These limitations are designed to correspond with the deductible amount of health insurance plans. If you need it, your deductible amount will be available to you through your HSA. If not, it will continue to grow until next year. This brings us to one final and important limitation, which applies to distributions. You can withdraw money from an HSA to cover your medical expenses, but if you withdraw it for any other reason, you will have to pay taxes and penalties on your withdrawal.

So who would benefit from having an HSA? If you are in good health, an HSA might be a good option for you. High deductible health insurance plans usually have lower premium payments. This means that you’ll save money on your monthly health insurance bill. Instead of giving that savings to an insurance company, you can put it into your HSA, where it will grow tax free until you really need it. Even better, some high deductible health insurance plans fully cover preventive care costs, like annual visits to the doctor. If you have one of these plans, not only will you save on your monthly premium, but you won’t have to pay very many out-of-pocket expenses either, which means that your HSA balance will be preserved. For healthy people who don’t have many medical care costs, this is a good deal.

The high cost of health care takes a bite out of everyone’s budget, so Congress has given smart tax planners some tools to help. They’re not easy, or perfect, but with a little bit of planning, they can help you save money. If you make careful estimates, the FSA can cut the cost of your medical expenses from year to year. And if you don’t have many yearly expenses, the HSA will allow you to invest your money in an account where it can grow to cover future expenses. With these helpful options, visiting the doctor or the dentist doesn’t have to be (too) scary anymore.

Looking for more tax facts? Be sure to check out the complete archive of Daily Deductions.