During health plan or open enrollment time, your place of employment probably looks like many others. There are lots of “water cooler” conversations about different plans, past experiences, deductibles, and copays. Health savings accounts or HSAs are drawing your attention, and you want to learn more.
Let’s say last year you spent $8,000 on the “Cadillac” medical plan, and you used $1000. The great news? Your family was blessed with a year of great health, and you had peace of mind by having a medical care plan.
The bad news? The high costs of that plan and $7000 gone.
What if there was an option to spend money on medical expenses only as you needed it and keep the rest?
If this is appealing, then a Health Savings Account (HSA) might be a good option for you and your family.
What Is A Health Savings Account (HSA)?
The simplest way to describe a Health Savings Account – it’s a tax-advantaged savings account for medical expenses.
An HSA is a plan allowing you to save for medical expenses while reducing your taxable income. One of the best advantages of an HSA, besides being pre-tax, is that it can eventually be used as a future investment.
The money in the HSA is not taxed when it’s deposited, similar to a traditional 401k deduction. This reduces your taxable income for the year and means you keep more of your hard-earned money.
One advantage of an HSA over a Flexible Spending Account (FSA) is that the money does not have to be spent within a specific timeframe. The unused money in an HSA rolls over from year to year.
There are maximum annual amounts you can contribute to an HSA, however. The contribution limits for HSAs in 2019 are $3,500 for an individual and $7,000 for a family. Adults over 55 can contribute an additional $1000. The HSA contribution limits for 2020 increase by $50 to $3,550 for self only and to $7,550 for a family. But there is no increase in 2020 for the over 55 additional contribution amount as it remains at $1,000.
Who is Eligible for an HSA?
Anyone who meets the following criteria is eligible for an HSA:
- Must choose a High Deductible Health Insurance Plan (HDHP)
The IRS defines an HDHP (for 2020) for an individual as a plan with an out-of-pocket maximum of $6,900 (2019 – $6,650) and a minimum deductible of $1,400 (2019 – $1,350). For a family plan in 2020, the out-of-pocket maximum is $13,800 (2019 – $13,300), and the minimum deductible is $2,800 (2019- $2,700). - Not enrolled in Medicare
- Must not be claimed as a dependent on someone else’s tax return
Talk to the benefits director at your employer to see if they offer this type of account in your benefits package.
If it’s not offered through your employer, check with your financial institution to see if they offer an HSA. If your financial institution offers it as an option, the money will go in post-tax but will be adjusted when you file taxes at the end of the year.
Morningstar recently released its 2019 Rankings of 11 Top HSA Providers to identify which HSAs represent the best choices for individuals as opposed to employers, where fees are often negotiable based on several factors.
What are the Pros of an HSA?
- Pre-tax Benefits
One of the most significant benefits of an HSA is that the money is taken out pre-tax. You reduce the amount of yearly income tax paid for the year. For example, say you make $50,000 per year. If you put $5000 in your HSA, you will be taxed as if you earned $45,000, which lowers your taxable income. - Boost Retirement
Additionally, an HSA can be used later to boost your retirement if the funds are not used. An HSA can be cashed out at age 65 but doesn’t have to be. There is no mandated payout at age 70 ½ that is typical of retirement plan terms. - Employer Contributions
Employers may contribute to their employees’ HSA accounts. A typical range of contributions is anywhere from $500-$2000. This may be a smaller amount than a standard 401K plan, but it is still free money. - Interest Bearing
If you don’t use your HSA fund, it accumulates interest. It’s like having a medical emergency fund savings account, which is most people’s largest expense. Many HSA’s are like a 401K in that you can choose how your plan is invested. The options to invest depend on which HSA company your employer (or financial institution) utilizes. People who are maxing out their 401K’s can use an HSA as another way to save additional tax-free money. - Choices
The HSA gives you the freedom to use your pre-tax money for eligible medical expenses. The money in your HSA can be used for various types of medical expenses, including prescriptions, eyeglasses, etc.
It can also be used at quick care providers, which are increasing in popularity because of the convenience and cost benefits. The standard rules for choosing in or out of network with your health plan do not apply to these types of providers.
What are the Disadvantages of an HSA?
- High Deductible Plan
Having a high deductible plan means you are going to pay more money out of pocket before your medical coverage kicks in. Your upfront costs will be higher whenever you have to use your medical coverage during the year until the deductible is reached. - Account Contribution Limits
There are limitations to how much you can add to your HSA each year. For 2020, the contribution limit for those under eligible family medical plans is $7,100 (2019 – $7,000). (Anyone who is 55 years or older can contribute an additional $1000 to the account limit.) - Penalties and/or Fees
If an HSA is not used correctly for eligible medical expenses, penalties will apply. It’s essential to watch out for HSA companies that may have account maintenance fees. - Risks
In the same way an HSA is similar to a 401K, there are typical risks associated when it comes to investing. The money is invested in the market, and a decline in the market could cause account values to see a drop as well.
How To Use an HSA
An HSA is easy to use. Most employers give you a card, like a debit card, to use for all related medical expenses. Some companies also provide checks connected to your HSA balance.
If you pay for a medical expense out of pocket, you can file a claim for reimbursement. How an HSA is used precisely, is dependent on your benefit plan and company guidelines.
When Can You Access Your Accumulated HSA Funds?
As of 2019, any unused funds left in your HSA when you reach the age of 65 can be withdrawn. You have to pay income tax on the amount, but it has accumulated tax-free and earned interest up to that point.
Summing Up Health Savings Accounts
Determining if an HSA is right for you requires comparing plans and deciding if it is a cost-effective option for your family situation.
There are pros and cons associated with an HSA, and limits to how much you can contribute each year. Still, it is an appealing option for those seeking another tax-advantaged investment option in addition to the traditional 401K.
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