I am wanting to know the real benefits or pros/cons of a HSA in the USA. I have now been given the option of signing up for one due to healthcare changes. I understand some of the basics, but after reading some of the limitations and restrictions, I am not sure if it is the best option for me. What is the advantage outside of using pre-tax dollars for healthcare expenses? Is this a better way to approach health care costs instead of itemizing health care expenses on yearly federal taxes?
- As fennec mentions, this is literally a savings account that you can use for qualified medical expenses, with no time limitation (unlike an FSA where you must use the money by the end of the year)
- The tax benefits for can be large. if you're in the 25% federal tax bracket and your state charges you an additional 7% taxes in your income bracket, if you put $3,000 into an HSA in a year, $3000 will be knocked off your AGI for taxes and so you'll owe 32%*$3000 =$960 less money in taxes come tax day (assuming you don't adjust your witholdings).
- If your employer offers it, you can put money in your HSA just like a 401k - PRE tax. That means you get the tax savings of putting money in an HSA over the year instead of in a lump sum at the end of the year.
- If you're well off and healthy, this is a great investment vehicle. You can put money into a Vanguard HSA or a HSA savings account with a higher interest
- Premiums are often lower for HSA's than other types of insurance.
- Often preventative coverage is completely covered (doctors visits, immunizations etc).
- By law HSA's must have a high deductible - $1200 for singles or $2,400 for families according to this source.
- From what I've seen of HSA's, you're on the hook for any drugs you buy until your deductible is met. Depending on how many drugs you are on this could get costly.
- It can take time to find a good HSA account that gives you a good return at a reasonable cost. Check out investment vehicle links above for some good options IMO.
- If you or someone in your family gets injured or goes to the ER/hospital a lot, you'll chew right through your deductible.
- It takes time to manage the inflow/outflow of money into and out of your HSA. You have ultimate flexibility and the ultimate responsibility of proving to the IRS (if they audit you) that you used the money for qualified medical expenses.
- Tax laws changing makes the viability of these accounts uncertain. Perhaps something that is allowable as a qualified medical expense now, will not be considered a qualified medical expense later - like over the counter drugs next year, due to some stupid changes (in my opinion). see Wikipedia:
However, beginning in early 2011 you will no longer be able to pay for OTC (over the counter) medications with HSA dollars
- I've found it easiest to pay for expenses through a credit card and then keep track of those which are reimbursable in a spreadsheet, and take a HSA withdrawl to cover my expenses. Other options include paying for large health care expenditures (e.g. getting LASIK) directly out of your HSA.
- State income taxes may or may not exclude HSA's
- You have to make sure when you use healthcare that you bill it to your insurance, otherwise it isnt counted as part of your deductible (even if you are fully responsible for the bill).
- A general thought - HSA's fit the classical model of "insurance", which is, to insure against very bad things happening (car accident, cancer etc). You're on the hook for the first $X,000 (the deductible) for that year, but typically everything after is covered by the insurer.
- HSA's are good if you actually investigate the costs associated with healthcare - don't go to an ER if urgent care will do, or if you don't need to go to urgent care, forego it.
The big benefit of a health savings account is the savings aspect. HSAs let you save up and invest money for your health care expenses. You don't just pay for medical care with pretax dollars - you get to invest those pretax dollars (possibly until you've retired). If you can afford to put money in the plan now, this can be a pretty good deal, especially if you're in a high tax bracket and expect to remain there after retirement.
There are a lot of obnoxious limitations and restrictions, and there's political risk to worry about between now and when you spend the money (mostly uncertainty about what the heck the health insurance system will look like after the fight over ObamaCare and its possible repeal.)
CrimsonX did a great job highlighting the primary pros and cons of HSAs, so I won't go into detail there. However, I did want to point out another pro - HSAs are (or can be) easy to manage. You said:
Is this a better way to approach health care costs instead of itemizing health care expenses on yearly federal taxes?
I'm not sure which company you are looking at establishing your HSA with, but with mine I have a debit card that I use when paying for medical care and then at the end of the year I get a 1099-SA that provides the amount of money spent on qualified purchases that calendar year. Yes, there are a few extra boxes I need to fill in for my 1040 come tax time, but I don't need to itemize my healthcare costs over the year. It really is pretty simple and straightforward.
Also, one con that is worth noting is that you become much more sensitive to healthcare costs due to the high deductible healthcare plan an HSA requires. For example, in all the years we've had an HSA we've not yet met our deductible, which means we pay out of pocket for any non-routine doctor visits. (The health insurer pays 100% of routine visits, like my wife's annual, well-baby check ups for the little one, and so on.)
So, when you're feeling really sick and think a doctor's visit would be warranted, you have to make a decision:
- Do I go to the doctor's - which will cost $150?
- Do I go to CVS Minute Clinic, or something similar, which will run $45-$60 but be less thorough? Or
- Do I just tough it out?
After being faced with this decision a time or two you will start to envy those who have just a $20 copay!
Of course, that's just an emotional con. Each year I run the numbers on how much we spent per year on out of pocket plus premiums and compare it to what it would cost in premiums for an HMO-type plan, and the HSA plan always comes ahead. (In part because we are a pretty healthy family and I work for myself so do not get to enjoy group discount rates.) But I thought it worth mentioning because there are certainly times when I know I need to see a doctor or specialist and I cringe because I know I am going to be slapped with a big bill in the not too distant future!
Compared to a regular after tax savings account, there are several downsides of HsA:
1) many many fees by the bank - account opening fee, monthly maintenance fee, etc, up to $70/year
2) early withdrawal fee of now 20% of all the withdrawn monies. If you are in the 35% tax bracket, this will cost you %55 ---- they take more than half of your money if you make a mistake and must withdraw early for non-med purposes.
There is no such downsides with regular savings accounts that are after tax.
One more upside that hasn't been mentioned yet in the other answers, from https://personal.vanguard.com/us/whatweoffer/overview/healthsavings (mirror):
Once you reach age 65, all nonmedical withdrawals are taxed at your current tax rate, just like a traditional IRA.