Pros and Cons of Health Savings Accounts

Health Savings Accounts (HSAs) came on the health care scene in 2003, when Congress approved them as part of broader Medicare reform. They allow qualifying Americans to save for current and future health care expenses by depositing tax-deductible contributions into an account administered by a trustee. While the accounts provide tax and savings benefits, they come with drawbacks and limitations depending on your health care needs.

High Deductible Insurance

• According to the Internal Revenue Service, you must have a High Deductible Health Plan to qualify for a Health Savings Account. Any other coverage or lack of coverage disqualifies you. Depending on your personal health care needs, this can translate to greater savings or unrealistic costs. According to the Mayo Clinic, critics charge that healthy individuals benefit most because they require few health expenditures, and high deductibles almost always mean lower premiums, which maximize their savings. On the other hand, Rutgers University advises that those with chronic illnesses "may need to think twice about enrolling" because high deductibles can spiral costs out of control for them.

Tax Benefits

• Tax benefits sweeten the deal.

  According to Rutgers University, "If you already have a high-deductible individual policy, adding an HSA is a no-brainer for the tax savings alone." The law excludes employer contributions from income, and those who fund their own accounts can subtract contributions as an "above the line' deduction on their tax return, meaning that itemized deductions are not necessary, according to the U.S. Treasury. Sweetening the deal, earnings from interest and investments grow tax-free, and as long as withdrawals pay for qualified health expenses, users incur no penalties or taxes. On the other hand, for those with chronic illnesses, frequent medical expenses, especially under a high deductible plan, might cancel out any tax benefits.

Roll Over Savings

• Savings add up.

  Unlike Flexible Spending Accounts, the balance in a Health Savings Account "rolls over year after year," according to the U.S. Treasury. This creates greater savings for the golden years, when expenses will likely increase.

Flexibility

• If and when you do need to withdraw funds, you have freedom to cover expenses that insurance traditionally will not pay for, such as over the counter medication, or health expenses for a spouse or dependent, according to the U.S. Treasury. Rutgers University advises that Health Savings Accounts also offer flexible investment plans, including "mutual funds and stocks," which means consumers can choose a risk profile to meet their comfort level. Finally, the account is "'portable' so it stays with you if you change employers or leave the work force," according to the Internal Revenue Service.

Unpredictable Health Needs

• Foretelling your health future is impossible.

  Nobody can predict the future, and according to the Mayo Clinic, critics warn that this presents a drawback for anyone considering a Health Savings Account. While you may not have a chronic illness today, your doctor might diagnose one tomorrow, rendering high deductible insurance a risk to your finances and health care access.