Health Savings Account (HSA)
A health savings account (HSA) combines high deductible health insurance with a tax-favored savings account. Money in the savings account can help pay the deductible. Once the deductible is met, the insurance starts paying. Money left in the savings account earns interest and is yours to keep.
Health Savings Account Advantages:
- Tax-deductible ~ Contributions to the HSA are 100% deductible (up to the legal limit) — just like an IRA.
- Tax-free Withdrawals to pay qualified medical expenses, including dental and vision, are never taxed.
- Tax-deferred Interest earnings accumulate tax-deferred, and if used to pay qualified medical expenses, are tax-free.
- HSA money is yours to keep unlike a flexible spending account (FSA), unused money in your HSA isn’t forfeited at the end of the year; it continues to grow tax-deferred.
Why High Deductible Health Insurance? To get the benefits of an HSA, the law requires that the savings account be combined with a qualified high deductible health insurance plan which can cost less than other health insurance plans. In 2016, the minimum annual deductible of a qualified HSA plan for an individual is $1,300 and $2,600 for a family.
The IRS has set the HSA contribution limits for 2016 as shown below:
- HSA Contribution Limits. The 2016 annual HSA contribution limit for individuals with self-only HDHP coverage is $3,350, and the limit for individuals with family HDHP coverage is $6,750.
- HDHP Minimum Required Deductibles. The 2016 minimum annual deductible for self-only HDHP coverage remains $1,300 and for family HDHP coverage remains $2,600.
- HDHP Out-of-Pocket Maximum. The 2016 maximum limit on out-of-pocket expenses (including items such as deductibles, co-payments, and co-insurance, but not premiums) for self-only HDHP coverage is $6,550 (a $100 increase from 2015), and the limit for family HDHP coverage is $13,100 (a $200 increase from 2015).