A Health Savings Account or HSA is a special type of financial account for individuals with high-deductible health plans (HDHP). These financially beneficial accounts are governed by Internal Revenue Service (IRS) rules and help eligible consumers save and pay for qualified medical expenses not covered by health insurance. After monies are contributed to the HSA account, they can grow and compound without tax consequences, similar to retirement accounts.

The HSA inflation-adjusted contribution limits for 2016 have increased slightly over those of 2015. The following chart illustrates the 2016 contribution and out-of-pocket limits for HSAs as well as high-deductible health plans. (For more, see: Pros and Cons of a Health Savings Account.)

  2016 HSA Contribution and Out-of-Pocket Limits for Health Savings Accounts  

 

HSA contribution limit for employer + employee

 

 

Individual: $3,350

Family: $6,750

 

HSA catch-up contributions (age 55 or older)

 

 

$1,000

 

HDHP minimum deductibles

 

 

Individual: $1,300

Family: $2,600

 

 

HDHP maximum out-of-pocket amounts (deductibles, co-payments and other amounts, not including premiums)

 

 

Individual: $6,550

Family: $13,100

 

HSA Versus FSA Accounts

An HSA may be a better alternative for you and your family than the popular flexible spending account (FSA). If you know how much you’ll spend on healthcare in a given year, then a FSA is great. If you don't, then you could run into some trouble. You can’t change the FSA contribution amount in the middle of the year, and you forfeit any unused funds at the end of each annual time period. (For more, see: How Flexible Spending Accounts Work.)

In contrast with an FSA, the HSA contributions don’t need to be spent within a certain time period. If unused, the money may remain in the account and grow from year to year. Furthermore, employees and contributors to the HSA account aren’t locked in to a certain contribution amounts.

There are additional HSA account benefits. If the account holder uses the money in the HSA to pay for qualified medical expenses, then there are no tax liabilities for the expense. Similar to an individual retirement account (IRA), contributions into the HSA are tax-deductible up to the legal limit. HSA accounts are quite flexible. Employees' HSA accounts are individually owned. That means when you leave your job, you keep the money from the HSA account. If between jobs, you can use the money in the account to pay for premiums. Those over age 65 can use the account to pay for Medicare premiums and out-of-pocket expenses. The best benefit for seniors is that after age 65, they can use their HSA funds penalty-free. If used for ordinary expenses, normal income taxes will apply. (For more, see: Comparing Health Savings and Flexible Spending Accounts.)

Penalties for Misuse of HSA Funds

As with other accounts with special tax benefits, there are penalties for misuse of money in the HSA account. Those under age 65, unless totally and permanently disabled, can expect to pay a 20% penalty when using HSA funds for non-qualified expenses. Non-qualified expenses might include paying for groceries or a vacation with money in the HSA account. In addition to the 20% penalty, the individual will be liable for income taxes upon withdrawal as well. (For more, see: Health-y Savings Accounts.)

The Bottom Line

The annual 2016 HSA deduction limits are only slightly changed from those of 2015, due to the low inflation rates. The HSA account can be a positive contribution to a wise financial plan, if you qualify. With a variety of investment options within the account, positive tax consequences and benefits, the HSA account can add to a long-term financial plan. (For more, see: High-Income Benefits from a Health Savings Account.)