Insurance

Ask Jean Thursday: What’s the Deal with Health Savings Accounts?

Posted by Jean

In 2007 and 2008 my work made us have HSA accounts at a local credit union and they would deposit money at the beginning of the year – I no longer work there and have not used any of the money in the account. Would there be a penalty for withdrawing the money (to pay bills, not for health reasons)? I have about $2,900 in the account.

-Jane, Maine

A HSA, or a Health Savings Account, is a tax-advantaged savings account that’s used to fund your medical expenses. These plans are becoming more and more popular—in fact, according to a 2008 survey by America’s Health Insurance Plans, 6.1 million Americans used HSA-qualified plans.

For those of you who are unfamiliar with them, here’s a little background on how HSAs work. Health Savings Accounts are funded one of two ways: either by your employer or by you. If your plan is employer sponsored, your employer deposits money into your HSA periodically. If you’re funding the account, you’re responsible for making the deposits. When it comes to deposits, there are limits. In 2010, the maximum annual contribution for an individual policy will be $3,050. The maximum contribution for a family policy will be $6,150. Are you 55 or older? If so, you can make an additional “catch up” contribution of an extra $1,000 each year.

HSAs are especially appealing for a couple of reasons. The first being taxes; or rather, the lack of taxes. If you’re the one depositing, you’ll get a tax deduction for your contribution. Additionally, the money, no matter who makes the deposit, grows tax free in the account and any withdrawals you make to cover medical expenses are also tax exempt.

Another upside to HSAs is the high level of control you have over your money. With a HSA, for the most part, you’re in full control over your account. This means that you’re the one calling the shots—which procedure you get, which doctor you see, which medical expenses you pay from the account, etc. Money in your HSA can also be used to cover procedures that aren’t typically covered by traditional insurance plans. Another added benefit is the fact that you’re able to use the money in your account to cover medical expenses for your spouse or any dependents you might have.

But where there are positives, there are sure to be negatives, and unfortunately, Jane, that’s where the answer to your question comes in. With Health Savings Accounts, when you need to withdraw money, you’re going to be taxed at regular income tax rates. Are you younger than 65? If you are, you’ll also be subject to a 10% penalty when you withdraw. If you’re over 65, you can withdraw your money without the 10% penalty. You will, however, be taxed.