Do you have a health savings account? The odds are high that you have no real idea of how it works.
An Alegeus Technologies study found more than 70 percent of consumers who have health savings accounts can't pass a basic proficiency quiz on how these accounts work.
Respondents often believed they'd lose money in their accounts if they didn't spend it each year. Others thought they could only use the accounts to pay for co-payments when they visit a doctor. Both assumptions are incorrect.
"Health savings accounts are one of the best-kept secrets for consumers," says Steve Auerbach, health insurance expert and Alegeus CEO. "There is a lot of potential for people to get better value out of these accounts."
Want to get the maximum benefit out of your health savings account, also known as HSA?
Here are five benefits of a health savings account:
1. It's like a 401(k) plan
You contribute to a health savings account much like you would a 401(k) retirement savings plan. Your employer removes a certain amount of dollars from each of your paychecks and funnels them into your account. In 2017, you can contribute a maximum of $3,400 for the year if you are the holder of an individual health savings account. If you are contributing to an account that is serving your entire family, you can contribute a maximum of $6,750 this year.
Health savings accounts come with a catch-up provision, too: You can contribute $1,000 over the annual limit each year if you are 55 or older.
If your employer doesn't offer this type of account for health care expenses, you can still contribute to one. You'll just have to shop private insurers to find a plan.
2. You'll pay less in premiums (via required high-deductible health insurance)
You can only contribute to an HSA if you have what is known as a high-deductible health-insurance policy. In 2017, this meant that your annual deductible had to be $1,300 for single account holders and $2,600 for account holders who wanted to cover a spouse or entire family.
In such plans, you are responsible for paying the annual deductible before your health insurance kicks in and starts covering the rest of your medical costs. For example, if you have a family, you'd need to spend $2,600 in health care costs during this year before your insurance would kick in to help cover your health care expenses for the rest of the year. You would use the dollars saved in your account to cover your deductible.
Advantage of lower premiums
That doesn't sound good, but there is a big advantage to high-deductible health-insurance policies: They come with lower premiums. During those years when you have lower medical bills, you might pay less than you would with a higher-premium traditional health insurance policy.
Chad Parks, CEO and founder of Ubiquity Retirement + Savings, says consumers shouldn't let the high deductibles scare them away from the combination of a health savings account and high-deductible plan. He has his own account, and says that he spends less than he would with a higher-premium health insurance policy.
"With a traditional plan, I knew for sure that I would spend $1,200 a month in premiums," Parks says. "That is gone every month, and will cover me if I have a medical problem. But only if I use medical services will I get a benefit. With the HSA and high-deductible plan, I would pay a lot less in premiums every year. It turned out I'd pay less with the HSA option. That made signing up for one a no-brainer."
3. The money in a health savings account rolls over
Many consumers worry that if they don't spend all the money in their health savings accounts every year, those dollars will disappear. This is one of the biggest misconceptions that consumers have about these accounts.
"This is not a use-it or lose-it proposition," says Rebecca Palm, chief strategy officer and cofounder of CoPatient. "Other accounts like flexible spending accounts do operate that way. If you don't use your money, you lose it every year. People get nervous that this will happen with an HSA. They shouldn't. That money does roll over."
If you end the year with $700 left in your HSA, that money rolls over and remains in your account.
4. This money can grow and earn interest
The money in your account can grow in other ways, too. First, you'll earn interest on the dollars in your account, which, depending on how large your accounts grow, could result in a nice chunk of change each year.
But many health savings plans also offer consumers the opportunity to invest the funds in their accounts into a number of investment vehicles. This works pretty much the same way that 401(k) plans work: You'll have the option to invest your health savings plan dollars into a number of mutual funds. This gives people with high-deductible insurance plans another way to invest in the stock market.
Of course, there is risk in this. Just like with your 401(k) plan, if your mutual funds perform poorly, you could see the value of your health savings dip.
5. There are triple the tax savings involved
Health savings plans come with some impressive tax benefits. In fact, financial pros say these accounts have a triple-tax advantage. The money you put into a health savings account is not taxed. So, if you deposit $6,000 into an account in a year, that money is no longer considered taxable income, which could save you some decent tax dollars April 18.
The earnings, interest and investment returns your dollars generate while in a health savings account are also tax-free.
Finally, if you withdraw money from your account for qualified medical expenses, you aren't charged taxes, either. And qualified medical expenses include more than you might think. Yes, it includes co-payments and prescription drugs. But you can also withdraw money from your account tax-free to cover dental visits, vision screenings and even over-the-counter medications.
Financial penalties using health savings accounts
If you withdraw money from your health savings plan for non-medical expenses, you will have to pay taxes. You'll also face a penalty of 20 percent if you do this before you reach the age of 65. Once you've hit 65, you'll still have to pay taxes when you withdraw funds from your account for non-medical reasons, but you won't be hit with an additional penalty.
John Inhouse, market executive with the Atlanta office of Merrill Lynch, says he expects more consumers to sign up for health savings accounts as they learn more about the tax and other benefits of these accounts.
"Right now, I think it's just a simple lack of understanding that is keeping more people from signing up for HSAs," Inhouse says. "Employers need to do a better job of educating their employees about these plans. They have to show them that these plans are a great way to put money aside."
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