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October 28, 2010
Health Savings Accounts: Five Things You Need To Know
More and more companies are switching to high-deductible plans that can be combined with tax-advantaged Health Savings Accounts to cover medical bills. Such plans usually have premiums of 10 to 40 percent less than traditional plans. Approximately 45 percent of large companies offer this option, and that’s an increase of 25 percent from 2007, according to the human resources firm Towers Watson.
To pay for health care, you can deposit pretax dollars into your Health Savings Account of up to $3,050 for individuals in 2011, or $6,150 for families, plus an extra $1,000 if you're 55 or older. Your employer may also contribute, and any unused funds roll over year after year to earn tax-free interest. Withdrawals for qualified health care expenses are also tax-free.
These types of HSA plans can make sense for healthy, young people who need little health care. They may also work if you need a lot of health care, such as when you develop cancer, according to Jay Savan, a consultant with Towers Watson and a financial planner. That’s because these plans limit your out-of-pocket expenses to $5,950 for individuals, or $11,900 for families. After that, you pay nothing more. With traditional plans, you'd never stop owing co-pay charges.
Both the deductible and your coverage can vary widely so it’s important to evaluate each HSA plan carefully before you enroll. Ask your insurer for a breakdown of your 2010 expenses so you can accurately compare how much you'd have to pay under different plans.
If you don’t spend all of your HSA balance on health care, the remainder grows tax-free like an IRA. Starting at age 65, you may withdraw funds without a penalty and use the money for any purpose, but you will owe income taxes on it.
Posted by Wiley Long at October 28, 2010 10:34 AM