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What Are the Downfalls of HSA?

Consumer-driven health care initiatives like the Health Savings Account or HSA are designed to put consumers in charge of their health care costs. The reasoning is that when consumers spend their own dollars, they will shop around more carefully and over time, those smart decisions will drive down the cost of health care services for everyone. But while health savings accounts certainly have their place, they may not be the panacea some have imagined. Understanding the pros and cons of these plans is the best way to understand their place in your own budget.

  1. Low Contribution Limits

    • While an HSA is a good way to put money aside, the low contribution limits mean you could theoretically exhaust your HSA and still have to make up the difference out of your own pocket. For the 2010 tax year, the most you can put in a single HSA plan is $3,050. If you have a high deductible health plan that covers your family as well as yourself, you can put in up to $6,150. If you are 50 years of age or older, you can contribute an extra $1,000, but it could still take a few years worth of contributions to build up enough to cover the cost of a major medical event.

    Spending Restrictions

    • One of the main problems with a health savings account is that the money you put aside can only be used for approved health care expenses. While it is relatively easy to determine which expenses can be paid out of your HSA funds, if you make a mistake, you could be subject to additional taxes. When you make a purchase at the drug store, for instance, you will have to separate your medical purchases, like prescription drugs, from non-medical purchases like groceries and candy bars. That means paying for part of your purchase with your HSA debit card and the rest with cash or another credit card.

    Tax Consequences

    • If you fail to follow the rules established by the IRS, you could be subject to taxes and penalties. For instance, if you use the funds in your health savings account for non-medical purchases, you will owe taxes on that money. Those taxes will reduce the tax benefits of the HSA and the attractiveness of the tax shelter.

    Health Plan Restrictions

    • You can only contribute to a health savings account if you already have a high deductible health plan in place. For 2010, that means a plan with a minimum deductible of $1,200 for a single person or $2,400 for a family. Not all health plans qualify, so you will have to check with your employer or health insurance broker to see if your plan is considered an HDHP under IRS regulations.

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