We would be remiss, after all our enthusiasm about HSA‘s, if we didn’t consider the down side of this approach. And of course, there is a down side.
The HSA way is great if you are generally healthy and a disciplined saver. If you trust yourself to regularly fund your HSA account and understand that those dollars are for future health care expenses, terrific! You can access the money for other non-medical things in an emergency – no problem. But doing so will cost you, both in taxes and penalties, unless you are 65 or older. At that age, you will just have taxes to deal with, no more penalties.
And your HSA must be tied to a qualified high deductible health plan. This plan must be your only plan, though you can have vision, dental, disability and long-term care coverage in place elsewhere. The deductible, the dollar amount you must pay annually before the plan coverage kicks in, is a big number. Because the deductible is higher than on a more traditional major medical policy, the annual premium is lower. The theory is that you will park the difference, in dollars, in your HSA. And you can keep (roll over) any unspent money each year.
Your HSA dollars can pay deductible expenses, copays, coinsurance payments and other noncovered medical and health care expenses.
Let’s sum up some of the pro’s and con’s:
- You control how your HSA dollars are spent. Any unused money stays in your account and can be used for future medical expenses.
- You can do your research and shop around for care based on quality and cost.
- You decide how much money to set aside for your health care costs.
- Your employer may contribute toward your HSA.
- Money can be directed to your HSA on a pre-tax basis, or may be deducted from your taxable income.
- Those of us who are older or have more health challenges or are sicker may not be able to save as much as younger, healthier people who need far less medical care each year.
- Information about health care, including cost and quality, can be very difficult to find – and you may not have the time or opportunity to do this homework first.
- Illness is often unpredictable, making it very hard to accurately budget for health care expenses.
- Pressure to save the money in your HSA may lead you to forego important care.
- If you withdraw money from your HSA for non-medical expenses, you will have to pay taxes on it. And if you’re under 65, you will also have to pay a 10% penalty.