Pitfalls of Health Savings Accounts:

Although health savings accounts are generally considered to be very useful, there are certain pitfalls that you will need to be aware of before you set up your account. There are specific limitations and regulations that you will need to follow to get the most out of your HSA.

Pitfall #1 - High Deductible Insurance Plans

If your current insurance policy is not a high deductible health insurance plan, this means that you will need to find a new insurance policy if you wish to use your HSA to pay for your premiums and health care needs. If you have had the same health insurance policy for years, this can be a problem.

In addition, if you have a pre-existing condition that your current health insurance plan is covering, it can be difficult to find a new insurer that will offer you the same level of benefits. It is very important to research all of your possibilities before making a switch.

When you switch to a new health plan, you may also have to go through a waiting period before your new benefits become active. For some people, this may not be a wise option. It is important to weigh the savings that your HSA will provide as opposed to what you will have to pay by switching to a new plan.

Pitfall #2 - Taxation on Non Qualified Medical Expenses

When you use your health savings account for qualified medical expenses, you are able to do so tax-free. However, if you pay for something that is not considered a qualified medical expense, you will be taxed on this purchase.

In most cases, this is not a problem, unless you plan to use your health savings account for emergency purposes. You are free to use the money however you would like, but you will be taxed if it is not used for qualified medical expenses.

Pitfall #3 - Penalties

If you are under the age of 65 and plan to use the money in your health savings account for non-qualified expenses, in addition to taxation on these purchases, you will have to pay a 10% penalty fee.

In the event that you need to use your health savings account for a large purchase, this penalty fee may be quite high, further depleting your HSA.

After the age of 65, you may use your HSA for non-qualified expenses without the 10% penalty fee, but you will still be taxed on your purchases.

Pitfall #4 - Reaching the Age of 65

Under the current HSA regulations, once you reach the age of 65, you are no longer able to contribute to your HSA. For people who plan on working past the age of 65, or for those who are worried about having enough money to pay for long-term care, this can be a problem.

In addition, if you become enrolled in Medicare, you cannot use your health savings account to purchase a Medigap policy. However, you can use the money in your HSA to pay for insurance premiums in addition to your Medicare benefits, as long as it is not a Medigap plan.

As with any health plan, there are good sides and bad sides. The pitfalls of HSA's are generally small and with prior knowledge, you can make the most of your situation with careful planning. For example, you can select a high deductible insurance plan that will be eligible for your HSA by comparison shopping to find the plan that will offer you the most coverage, with the least amount of out-of-pocket expense.

In addition, if you are close to reaching 65, you can take advantage of the "catch-up" program, which allows you to make more than the maximum amount of contribution in your HSA to ensure that you will have enough saved to meet your future needs.

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