Friday, February 12, 2016

Everybody's Money Matters: Benefits of Health Savings Accounts

This Q&A, based on a reader's submission to Everybody's Money Matters, earns her a $50 Visa gift card.


What are the benefits of having a health savings account?

Kirkland, Wash.

Member, Alaska USA Federal Credit Union


Health savings accounts (HSAs) are tax-advantaged savings accounts that were created to help people save for future medical expenses. You can use an HSA to cover deductible expenses, co-pays, and other noncovered health-care expenses—for yourself, your spouse, and your dependents.

To qualify for an HSA, you must meet these requirements:

  1. You must be covered under a qualifying high-deductible health plan. High-deductible health plans have relatively low annual premiums, but your insurance doesn't kick in until you've met your deductible, which for 2014 is a minimum of $1,250 for single coverage and $2,500 for family coverage;
  2. You must not have other health coverage, but you can have dental, vision, disability, and long-term care coverage;
  3. You're not enrolled in Medicare; and
  4. You can't be claimed as a dependent on someone else's tax return.

Tax bennies of an HSA

The biggest attraction to HSAs is their triple tax benefit:

  1. Cash contributions to HSAs are 100% deductible from your federal gross income;
  2. Interest on savings accumulates tax-deferred; and
  3. Withdrawals from an HSA for "qualified medical expenses" are free from federal income tax. See for qualified medical expenses.

Other perks

In addition to tax benefits, HSAs offer other advantages as well:

  • Unused funds at the end of the year roll over to the next year.
  • You own the account and the money is yours if you change jobs even if a former employer contributed to your account.

Contribution limits

In 2014, eligible individuals with single coverage can contribute up to $3,300 and those with family coverage can contribute $6,550. HSA holders older than age 55 can save an extra $1,000; $4,300 for individuals with single coverage and $7,550 for individuals with family coverage.

Your employer can make contributions to your HSA, but total contributions between you and your employer cannot exceed contribution limits.


Though there are many benefits of HSAs, there are downsides as well:

  • If you withdraw funds from an HSA before age 65 for nonmedical expenses, you'll have to pay taxes in addition to a 20% penalty.
  • HSAs are complex and, if not administered properly, can cause adverse tax consequences. Make sure you understand plan details.
The biggest attraction to HSAs is their triple tax benefit.

If you are interested in an HSA, check with your employer to see if it offers a high-deductible health plan with an HSA option. In some cases, the insurance company will open an HSA for you at the same time you select the high-deductible health plan, or you can open an HSA on your own, through a credit union or another financial organization that offers HSAs.

"Switching to a high-deductible health plan can substantially reduce your premiums compared to the cost of traditional health plans," says Dennis Zuehlke, compliance manager at Ascensus, Middleton, Wis., the nation's largest independent retirement and college savings services provider. "You can use those savings to contribute to an HSA, get a tax deduction for the contribution, and then pay for qualified medical expenses not covered by the high deductible health plan tax-free from the HSA. There is simply no other tax-advantaged account that offers the triple tax benefits of an HSA," Zuehlke adds.

New for 2014: Everybody's Money Matters

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  1. A consumer or personal finance question; or
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  3. A personal, true account of exemplary service or treatment by your credit union.

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