Many people are first attracted to consumer-directed health plans (CDHPs) that feature a health savings account (HSA) simply because the monthly premium is lower than that of the more traditional plan with co-pays. However, if they stop at the premium savings, they are really missing the best part of this unique insurance/savings package – the HSA.
People who select a qualified HSA plan and open a HSA are actually signing up to receive a tax break. Any money deposited into the account is exempt from federal (and most state) income taxes. When funds are payroll-deducted on a "pre-tax" basis, employees and their employers also do not pay FICA taxes on the money contributed to the account.
Individuals, and those whose employers do not make pre-tax contributions an option, may still benefit. Any amount deposited into a health savings account before the tax deadline in April becomes an "above the line" deduction for the previous year's tax return. So that money is not counted as income, and therefore it's not subject to income tax.
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For the 2011 tax year individuals may put away $3,050 and families can save up to $6,150. Plan members over age 55 are allowed an extra $1,000 per year to play catch up.
It seems that everyone wants to save money on taxes, but many people still do not take full advantage of the opportunity. Some are worried that they may not use the entire amount they contribute and will lose money at the end of the year. Not true with a HSA. Money added to the account by the plan member or the employer stays in the account year after year if not used.
Others may feel that they simply cannot spare another dime out of their otherwise overly committed paycheck. These people are in essence turning down a government sponsored program intended to subsidize their plan deductible and other medical expenses. By using after-tax dollars to pay for medical expenses these plan members are paying anywhere from 10% to 35% more than they should for their medical care depending on their tax bracket. Those in the 25% tax bracket and on a strapped budget can probably ill afford to spend an extra $600 a year on their health care, but that is just what this family would do to reach a $2,400 deductible.
If the money in the account is not used during the year it was contributed it remains in the account and continues to grow tax-free. Any interest earned or investment gains realized go untaxed.
There is nothing new about government sponsored programs that allow folks to put away money and grow savings on a tax-preferred basis. Retirement 401K plans have been on the scene for years. The big difference with HSAs is that not only does the money go in tax-free and grow tax-free; it can also be used right away without paying income taxes. As long as the funds are used to pay plan deductibles and other qualified medical expenses, the money placed in the HSA is never taxed.
It is once again open enrollment season and benefits advisors will find themselves in the best position to counsel employees on their choice of health plan. Presenting the health saving account as an essential component of the HSA-qualified health plan will help insure a successful consumer-directed health strategy. Need help? Take advantage of the many online calculators and other resources made available by health plans and HSA administrators.
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