Advantages and Disadvantages of Health Savings Accounts (HSAs)

Advantages and Disadvantages of Health Savings Accounts (HSAs)

Health Savings Accounts, which were put in place in 2003, were designed to help American workers cover the costs of various eligible medical expenses. In order to qualify for an HSA, you must be enrolled in a high-deductible health plan. Additionally, you can’t currently be enrolled in Medicare, and you can’t be claimed as a dependent by anyone else. Should you qualify for an HSA, the contribution limit in 2018 is $6,900 for families and $3,450 for self-only coverage. For workers ages 55 and older, an additional $1,000 catch-up contribution can be added to these limits.

Is an HSA the right choice for you? Below we’ll break down the advantages and disadvantages to these accounts.

Benefits of HSA accounts

One of the biggest allures of an HSA account is its triple tax benefit. Money is deposited pre-tax, it grows tax-free, and is distributed tax-free as long as the funds are used for qualified health care expenses. Any funds left in the account at the end of the year roll over to the next year, allowing account holders to pay for current health costs while also saving for the future. And while employers can typically contribute to an HSA account, the account is portable, so if you change jobs or health insurance plans, or enter retirement, the account remains with you. Lastly, HSA accounts are typically linked to a debit card, allowing for convenience and easy access to cash at ATMs.

Drawbacks to HSA accounts

Just like any retirement savings plan, HSAs come with their share of disadvantages, including a high deductible requirement. Although you pay less in monthly premiums, you are responsible for all healthcare costs until the deductible is met. Additionally, illness is unpredictable, making saving and budgeting for it elusive and difficult to pin down, which could result in expenses that exceed your savings. Add to this to the pressure many American workers feel to build up savings and some people may choose to skip out on seeking medical care when they need it.

Other potential disadvantages of HSAs include fees and recordkeeping. Some HSAs charge monthly maintenance or per-transaction fees, but sometimes these fees are waived if the account holder maintains a particular minimum balance. And eligible healthcare expenses need to be proved, so recordkeeping and tracking receipts is a must. Finally, withdrawing funds for non-qualified expenses before age 65 results in a 20 percent penalty and taxes owed; after age 65 you’ll pay taxes but no penalty.