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Health Savings Accounts: Are They Just What the DoctorOrdered?

August 28, 2015

Are health insurance premiums taking too big of a biteout of your budget? Do you wish you had bettercontrol over how you spend your health-care dollars?If so, you may be interested in an alternative totraditional health insurance called a health savingsaccount (HSA).

How does this health-care optionwork?An HSA is a tax-advantaged account that's pairedwith a high-deductible health plan (HDHP). Let's lookat how an HSA works with an HDHP to enable you tocover your current health-care costs and also save foryour future needs.

Before opening an HSA, you must first enroll in anHDHP, either on your own or through your employer.An HDHP is "catastrophic" health coverage that paysbenefits only after you've satisfied a high annualdeductible. (Some preventative care, such as routinephysicals, may be covered without being subject tothe deductible). For 2015, the annual deductible foran HSA-qualified HDHP must be at least $1,300 forindividual coverage and $2,600 for family coverage($1,250 for individual coverage and $2,500 for familycoverage in 2014). However, your deductible may behigher, depending on the plan.

Once you've satisfied your deductible, the HDHP willprovide comprehensive coverage for your medicalexpenses (though you may continue to oweco-payments or coinsurance costs until you reachyour plan's annual out-of-pocket limit). A qualifyingHDHP must limit annual out-of-pocket expenses(including the deductible) to no more than $6,450 forindividual coverage and $12,900 for family coveragefor 2015 ($6,350 for individual coverage and $12,700for family coverage in 2014). Once this limit isreached, the HDHP will cover 100% of your costs, asoutlined in your policy.

Because you're shouldering a greater portion of yourhealth-care costs, you'll usually pay a much lowerpremium for an HDHP than for traditional health

insurance, allowing you to contribute the premiumdollars you're saving to your HSA. Your employermay also contribute to your HSA, or pay part of yourHDHP premium. Then, when you need medical care,you can withdraw HSA funds to cover your expenses,or opt to pay your costs out-of-pocket if you want tosave your account funds.

An HSA can be a powerful savings tool. Becausethere's no "use it or lose it" provision, funds roll overfrom year to year. And the account is yours, so youcan keep it even if you change employers or lose yourjob. If your health expenses are relatively low, youmay be able to build up a significant balance in yourHSA over time. You can even let your money growuntil retirement, when your health expenses are likelyto be substantial. However, HSAs aren't foolproof. Ifyou have relatively high health expenses (especiallywithin the first year or two of opening your account,before you've built up a balance), you could depleteyour HSA or even face a shortfall.

How can an HSA help you save ontaxes?HSAs offer several valuable tax benefits:

• You may be able to make pretax contributions viapayroll deduction through your employer, reducingyour current income tax.

• If you make contributions on your own usingafter-tax dollars, they're deductible from yourfederal income tax (and perhaps from your stateincome tax) whether you itemize or not. You canalso deduct contributions made on your behalf byfamily members.

• Contributions to your HSA, and any interest orearnings, grow tax deferred.

• Contributions and any earnings you withdraw willbe tax free if they're used to pay qualified medicalexpenses.

Consult a tax professional if you have questionsabout the tax advantages offered by an HSA.

Most HSAs allow you tocontribute throughautomatic transfers froma bank account or, ifyou're employed, throughan automatic payrolldeduction plan.

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is notspecific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposeof avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or herindividual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believedto be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any timeand without notice.

Investment advisory services are offered through a separate entity, Portfolio Medics, a registered investment advisor. Sovereign RetirementSolutions and Portfolio Medics are not affiliated. Sovereign Retirement Solutions provides insurance services to clients through Paul M TarinsLLC.

Can anyone open an HSA?Any individual with qualifying HDHP coverage canopen an HSA. However, you won't be eligible to openan HSA if you're already covered by another healthplan (although some specialized health plans areexempt from this provision). You're also out of luck ifyou're 65 and enrolled in Medicare or if you can beclaimed as a dependent on someone else's taxreturn.

How much can you contribute to anHSA?For 2015, you can contribute up to $3,350 forindividual coverage and $6,650 for family coverage(up from $3,300 and $6,550 respectively, in 2014).This annual limit applies to all contributions, whetherthey're made by you, your employer, or your familymembers. You can make contributions up to April15th of the following year (i.e., you can make 2014contributions up to April 15, 2015). If you're 55 orolder, you may also be eligible to make "catch-upcontributions" to your HSA, but you can't contributeanything once you reach age 65 and enroll inMedicare.

Can you invest your HSA funds?HSAs typically offer several savings and investmentoptions. These may include interest-earning savings,checking, and money market accounts, orinvestments such as stocks, bonds, and mutual fundsthat offer the potential to earn higher returns but carrymore risk (including the risk of loss of principal). Makesure that you carefully consider the investmentobjectives, risks, charges, and expenses associatedwith each option before investing. A financialprofessional can help you decide which savings orinvestment options are appropriate.

How can you use your HSA funds?You can use your HSA funds for many types ofhealth-care expenses, including prescription drugs,eyeglasses, deductibles, and co-payments. Althoughyou can't use funds to pay regular health insurancepremiums, you can withdraw money to pay forspecialized types of insurance such as long-term careor disability insurance. IRS Publication 502 contains alist of allowable expenses.

There's no rule against using your HSA funds forexpenses that aren't health-care related, but watchout--you'll pay a 20% penalty if you withdraw money

and use it for nonqualified expenses, and you'll oweincome taxes as well. Once you reach age 65,however, this penalty no longer applies, though you'llowe income taxes on any money you withdraw thatisn't used for qualified medical expenses.

Questions to consider• How much will you save on your health

insurance premium by enrolling in an HDHP? Ifyou're currently paying a high premium forindividual health insurance (perhaps becauseyou're self-employed), your savings will begreater than if you currently have groupcoverage and your employer is paying asubstantial portion of the premium.

• What will your annual out-of-pocket costs beunder the HDHP you're considering? Estimatethese based on your current health expenses.The lower your costs, the easier it may be toaccumulate HSA funds.

• How much can you afford to contribute to yourHSA every year? Contributing as much as youcan on a regular basis is key to building up acushion against future expenses.

• Will your employer contribute to your HSA?Employer contributions can help offset theincreased financial risk that you're assuming byenrolling in an HDHP rather than traditionalemployer-sponsored health insurance.

• Are you willing to take on more responsibility foryour own health care? For example, to achievethe maximum cost savings, you may need toresearch costs and negotiate fees with healthproviders when paying out-of-pocket.

• How does the coverage provided by the HDHPcompare with your current health plan? Don'tsacrifice coverage to save money. Read all planmaterials to make sure you understandbenefits, exclusions, and all costs.

• What tax savings might you expect? Taxsavings will be greatest for individuals in higherincome tax brackets. Ask your tax advisor orfinancial professional for help in determininghow HSA contributions will impact your taxes.

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