A HEALTH SAVINGS Account (HSA) is a type of savings account that lets you contribute money on a pretax basis to pay for qualified medical expenses. These accounts were established in 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act.

HSAs allow the consumer to control the plan, spend and invest the dollars as they wish. Thus the consumer is able to take the responsibility for how he or she spends health care dollars.

To be able to make a contribution, you must be enrolled in a high-deductible health plan (HDHP). For 2019, the plan must have a deductible of at least $1,350 for single coverage and $2,700 for families. HSAs have maximum out-of-pocket costs for 2019 of $6,750 for singles and $13,500 for families. Since you are responsible for paying a greater portion of your health care costs, the premiums for a HDHP usually are lower than they would be for traditional health insurance. You might be able to use the premium savings as part of your contribution to the HSA.

The contribution limit for 2019 is $3,500 for individual coverage and $7,000 for family coverage. If you are age 55 or older, you can make an extra $1,000 catch-up contribution per person. These contributions are inflation adjusted, so be sure to check the limits each year.

You are able to take a tax deduction for these contributions even if you do not itemize deductions. Some states allow a state tax deduction as well. Contributing on a regular basis will build funds for use now and in the future. HSA funds, including earnings, can be rolled over from year to year if they are not used.

Be sure to keep any receipts for medical expenses that have not been reimbursed — these expenses can be reimbursed in the future regardless of the calendar year. If your health costs are relatively low, you might be able to build up a significant balance in your HSA over time.

Medical expenses must be considered qualified in order to be eligible for payment from your HSA. Qualified medical expenses are defined as primarily alleviating or preventing a physical or mental defect or illness, including dental and vision. Qualified medical expenses may include deductibles, copayments, coinsurance, vision, dental care and other out-of-pocket medical costs. Such services as acupuncture and chiropractic may also be included.

If an expense is qualified, the distribution is tax-free. See Publication 502 Medical and Dental Expenses for more details on what is a qualifying expenses. This document is available on the IRS website, www.IRS.gov. It should be noted that HSA funds cannot be used for over-the-counter drugs that are not prescribed by a doctor. The funds can be used for you, your spouse or your dependents.

If any of the HSA funds are used for nonqualified medical costs, the amount will be taxed on the individual’s return. A penalty of 20 percent on the funds will also be imposed if the withdrawal occurs when the individual is younger than 65.

Another HSA avenue to explore is whether or not your employer will make contributions to your plan. This can help offset the increased financial risk that you’re assuming by enrolling in an HDHP rather than traditional employer-sponsored health insurance.

As each health plan is different, be sure to review the specific details of coverage to ensure the plan will meet your needs prior to purchasing the coverage. You will also want to see how HDHP coverage compares with your current plan. You might not want to sacrifice coverage to save money. Read all plan materials to make sure you understand the benefits, exclusions and costs before selecting HDHP coverage.

As can be seen, HSAs can be complicated. We suggest discussing the topic with a financial professional before you start your account. Remember that your health, and the insurance that covers it, is one of the most important areas of your financial life.

Marc A. Hebert, MS, CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at mhebert@harborgroup.com. Your question and his response might appear in a future column.

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