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with high deductible health insurance, and putting the family deductible in the HSA. The premiums are even lower than the more traditional health insurance we have now. It seems like a no brainer, having struggled every year to spend our FSA before losing it. Are there any negative tax issues that should be understood here? Any idea what board to go to to research HSAs better?

IP
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with high deductible health insurance, and putting the family deductible in the HSA. The premiums are even lower than the more traditional health insurance we have now. It seems like a no brainer, having struggled every year to spend our FSA before losing it. Are there any negative tax issues that should be understood here?

On the tax front, not necessarily a negative, but it's a complex PITA if your eligibility changes during the year because of a change in employment.

I don't know a lot about these plans, but the one thing I can think of to fully research and consider is cash flow. Let's say, for example, that you have a major expense early in the year, before there's enough money in the HSA to pay it. Will you have enough cash to pay it from other funds, and if you do, can you replenish the HSA afterward?

Phil
Rule Your Retirement Home Fool
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On most you get the full amount if your expense is in the first month, if you are putting in 100 per month and have a bill of 1200 the first month, the HSA will pay the bill AND you will continue to contribute the 100 per month.
If you terminate employment early, you don't have to repay the difference.
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bookie71: "On most you get the full amount if your expense is in the first month, if you are putting in 100 per month and have a bill of 1200 the first month, the HSA will pay the bill AND you will continue to contribute the 100 per month.

If you terminate employment early, you don't have to repay the difference."


That is how I understand FSA - a flexible spending account - to work. But that does not match my understanding for an HSA.

Regards, JAFO
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Thanks everyone for your replies. Cash flow not a problem and change of employment highly unlikely.

IP
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I like our HSA; generally did not do much with the FSA because of the "use it or lose it" rule. Unfortunately we are no longer with the company that had the HSA, but our funds for the 3(?) years we were in it are totally ours and totally accessible to us. Furthermore, we can put a fair portion into various investments, so it's not just sitting there. And we don't use those funds unless we absolutely have to--general checkups, shots, etc. we pay out-of-pocket.

We changed employers last year (2011), so when I did the taxes I had to fill out a 1-page form declaring that we had overpaid about $150 into our HSA. Getting that backed out of the account was no problem--I think I did it all on line, in fact. (Unlike our overpayment to our 401K--talked to them on the phone--they wanted to know how/why the overpayment had happened (their stupid on-line stuff requires anywhere from 2-3 weeks to get changes through, so it's hard to know when to make the end-of-year changes in order to maximize what you put in). Also had to write a letter explaining what happened.) And the overpayment and interest on it got reported on our 1040, line 21, "Other income". No penalties.

After the first year, we maximized our contributions to the HSA. (The first year the company didn't provide enough information on exactly how it worked and my husband didn't start the paperwork until late so we just had to make some quick decisions and hope for the best.)

There is a TMF HSA board, but it doesn't get much traffic.

Kathleen
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bookie71: "On most you get the full amount if your expense is in the first month, if you are putting in 100 per month and have a bill of 1200 the first month, the HSA will pay the bill AND you will continue to contribute the 100 per month.

If you terminate employment early, you don't have to repay the difference."

That is how I understand FSA - a flexible spending account - to work. But that does not match my understanding for an HSA.


I agree with JAFO - At my employer the FSA is as bookie71 describes.
An HSA however is not.

It's possible that an employer could contribute to your HSA - however most don't.
The thing that gets emphasized over and over with an HSA is that it is "your money" - ie. you take it with you if you leave the employer.
FSA you don't.


The other downside I'll mention for an HSA is that it's a little extra paperwork at tax time. (I think it's one form sent to you from the HSA provider and one more form/worksheet to fill out) And since most people don't do HSA, I wouldn't entirely trust the "interview mode" for tax software. (I'd check that the form was done right manually before filing.) IIRC I had it screwed up one year because I said the money came from me, but really it came from my employer - although funded out of payroll deductions. The tax software thought I had over-contributed until I found the problem and fixed it.

There are two HSA msg board on TMF - this is the one with more posts:
http://boards.fool.com/health-savings-accounts-114566.aspx?m...
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Thanks Kathleen. Very helpful!

IP
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Thanks for the link. It's been marked for further examination.

IP
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I switched to a high deductible plan with an HSA last year. As others mentioned, you are a little more exposed early on until the HSA balance builds up. Once the HSA balance exceeds the annual out of pocket maximum, you're really in the clear.

The biggest difference I've noticed is that I'm paying more for random doctor visits until I hit the family deductible. I think I have to spend $1500 before coinsurance kicks in, then I pay 10% of negotiated fees, with an out of pocket maximum around $4-5k annually.

We have pretty low health expenses overall, so this isn't a huge deal, and HSA contributions have more than kept up with our health spending. I am also fortunate that my employer contributes $1200 or $2k/year to the plan, so I'm starting to build a decent balance there.
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Inparadise -

I’ll weigh in with my experience.

I’ve had my high deductible/HSA for about 5 years. I’ve been fortunate in that: 1) we’re relatively healthy and have only minor medical expenses; 2) we’ve been able to contribute substantially to the HSA (up to the maximum most years); and 3) we’ve been able to pay medical expenses (so far) out of pocket without needing to tap the HSA funds.

As jeffbrig points out, the biggest financial risk is during those early years while you are trying to build up a large enough pot of cash to cover your annual medical insurance deductible. But keep in mind that if you have the funds on hand, you can fully fund your HSA all at one time at the beginning of the year (or upon establishing the account); you don’t have to stretch out the funding on a monthly basis.

From a tax planning perspective, the HSA contribution is deductible as a gross income adjustment (probably only for your personal contributions, not employer contributions). FYI, 2012 contribution cap is $3,100 (for individual or $6,250 for family) with an additional catch-up allowed at age 55. As intended, funds can be withdrawn to reimburse (or pay for) qualified medical expenses and those funds are not subject to any federal tax or penalty. If you become unemployed, the HSA funds may be used to pay your medical insurance premiums (without any early withdraw penalty).

The HSA functions somewhat similar to an IRA. Interest/dividends/cap gains earned by the account grow tax deferred in the account. Also, you could incur “early withdraw” penalties for non-qualified withdraws. However, at age 65 you may withdraw the funds for any purpose without penalty (not sure if you need to pay federal tax if used for non medical expenses or not, I expect so…maybe someone else can answer that).

My personal financial goal is to take advantage of the annual tax deduction through HSA contributions for now and let the fund stockpile to cover future medical expenses once I’m on medicare (if it still exists at that point). Otherwise, I view it as a supplemental retirement account.

Within an HSA, you should have investment options such as mutual funds or brokerage/equities, in addition to the standard savings account/money market. My observation is that investment expenses seem to be higher and there are fewer options within HSA accounts (as compared to a traditional IRA). I do not know whether investment costs for HSA’s can be itemized as with IRA expenses…again, perhaps someone else can respond.

I do not see any negative tax implications....the paperwork/filing hassle mentioned in previous responses seems very minor relative to the many positive aspects.

That’s my story and I’m sticking to it.

Making Trax
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Thanks MT. That's even better than we had envisioned.

IP
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Within an HSA, you should have investment options such as mutual funds or brokerage/equities, in addition to the standard savings account/money market.
I think *most* HSA that are funded via paycheck deductions have ability to put $ into mutual funds.
I can say that the options provided by the plan my employer uses are horrible for fees / minimum investments.

*However*

HSA funds belong to the account owner.
SO - I can take my HSA money and take it over to my local credit union and put it into an HSA account there (they have no investment options IIRC, so probably not a great choice. But I think their fees are very low.)

OR - I can take it to another bank/investment company and get better options for investment (looked just now, and http://www.hsaadministrators.info might be an option -the $45 + $3.20/$1000 in annual fees isn't too terrible. And they do have a S&P 500 fund. )
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You may have to shop around to look for a bank/investment company that meets your intended invesetment needs and activity levels. If you intend to use your HSA as more of a short-term "pass through" account (e.g., similar to an FSA, where $ goes in and then is routinely pulled), you may not need anything more than a savings account (with debit card or check writing priveleges).

Because I hope to not tap into my funds for a while, I specifically shopped for a bank/investment company that provided self-directed brokerage options. I ended up chosing Bancorp. As I mentioned previously, fees for investing (with Bancorp, anyway) seem steep: $26 per buy/sell trade, and it looks like there are fees for inactivity (at least one trade required per year otherwise $25 fee), and also a fee if your brokerage balance falls below a minimum amount. I don't believe any of those fees are applicable if you simply keep everything in the regular savings account. With good planning, the fees can be minimized.

I don't see any reason why one could not open up a 2nd HSA account (as foolbar suggests) to deposit additional funds to reach the limit cap (not otherwise funded by employer).

MT
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