A Health Savings Account
A health savings account (HSA) lets people put aside pre-tax dollars to pay health care expenses. An HSA is only available as an alternative to people with a high deductible health care plan (HDHP).
Most HDHP plans offer lower premiums which make them attractive. But the high deductible can stop them from visiting a doctor or being able to get their medications. An HSA provides a way to cover healthcare costs before covering your deductible.
Not everyone is eligible, unfortunately. If you are, an HSA helps with health expenses and offers a small tax break.
Health Saving Account Rules
- You must have a health care plan that has a high deductible. A high deductible health plan has:
- An individual deductible of $1,400 per month or $2,800 per month for a family.
- Out of pocket maximum/limit of $6,900 for an individual and $13,800 per family.
- People who receive Medicare or Medicaid are not eligible for an HSA.
- People covered under a military health plan, like TRICARE, are not eligible.
- If someone can claim you as a dependent on their tax return, you are not eligible for an HSA.
- There are limits to the other insurance you can carry to be eligible for an HSA:
- Benefits tied to a specific disease.
- Benefits in conjunction with workman’s comp or other liabilities.
- Benefits that provide a fixed amount per day toward hospitalization.
- You can also carry separate insurance to provide the following and still be eligible:
- Accidents (as many people have on their auto insurance policy.)
- Long term care
- Dental insurance
- Vision insurance
- Disability insurance
- People with a prescription drug plan can be eligible for an HSA. But only if benefits are not available until the minimum annual deductible is met.
- There are limits on the annual amount you can deposit in your HSA. In 2020, the individual limit is $3,550 and $7,100 for a family.
- If your spouse has a different insurance plan, you may still be eligible for an HSA. But only if you are not covered on their plan and have your HDHP.
How Does a Health Savings Account Work?
A health savings account provides respite for high deductible health plans. Many people purchase the plans for lower premiums but end up with coverage they can’t afford to use. When you have an HSA you can cover some of your expenses before you meet the deductible.
(Just a reminder. The Affordable Care Act is still in effect. No matter what plan you have, you can receive many preventative services without charge. See everything you’re entitled to under the ACA here.)
If your HSA is with your employer, have money from your paychecks diverted to the HSA account. If not, send money from your bank account to an HSA by electronic fund transfer. Remember the sooner there is money in your account, the sooner you can save. If possible, transfer a larger amount upfront. Then set up a recurring amount until you hit your limit.
Fund your account and activate the debit card. Always carry your insurance plan ID during any health care transaction. At the pharmacy, your insurance plan determines the cost of your medication. Use your debit card to pay for the prescription.
A doctor visit will go against your deductible. Most high deductible plans prefer to bill you for services than to ask for payment upfront. If you’re give the option to make a co-pay, use your debit card. Your insurance company will send a statement to explain their portion of the payment.
If the deductible isn’t fulfilled, they have nothing to pay. Either way, you’ll get an invoice for the cost of services. If you have the money in your HSA, pay the bill with your card. If not, you’re responsible for paying the bill on your own.
Though medical debt can seem overwhelming, it’s best to try and work something out. If you can get a payment plan, you may be able to use your HSA for payments.
It’s easy to say, but please don’t put off necessary medical care because of financial concerns.
Here are the answers to a few commonly asked questions.
Q. Can I open an HSA while I’m employed?
A. Yes, as long as you meet the eligibility under the HDHP rules. Most major employers offer at least one HDHP. If your company doesn’t offer an HSA, contact the insurance company or bank to set one up.
Q. What does a health savings account pay for?
A. You can use an HSA to pay for any medical co-pay, prescriptions, glasses, and contacts. Here’s a long list of qualified expenses.
Q. How does an HSA save money?
A. Your investment in an HSA uses pre-tax dollars. Whatever amount you invest is deducted from your gross annual income. You pay less in federal income tax.
Q. Who can make contributions to my HSA?
A. You, your family, your employer and spouse can contribute to the account. Remember the limit remains the same.
Q. What about older adults?
A. Anyone over the age of 55 is allowed to contribute an extra$1000 to their HSA.
Health Savings Account Pros & Cons
The advantages of an HSA are easy to see. Here’s a list of the “Pros” for having an HSA.
The tax advantage for money in your HSA is three-fold. As noted earlier, the money you invest reduces your modified gross adjusted income. If you save $3000 in your account, you take that three grand right off the top of what you make.
Without an HSA, the only way to deduct medical expenses from your income is to itemize them on your tax return. That’s a long tedious process with a high potential for error. With an HSA, your account statement is a complete record of every expense, in case of an audit.
Any interest you make on the account is tax-free. You can even invest the money and any gains are interest-free. Bear in mind that investments go down as well as up. If you need to pull money from the account, be sure you can remove it without penalty.
When the money is taken out of your account for medical expenses, it remains tax-free.
Money Rolls Over
Don’t confuse an HSA with a Flexible Spending Account (FSA). The money you put in a health savings account doesn’t disappear at year’s end.
An employer offers the FSA as part of the benefit package. The account is also funded by pre-tax dollars. But it comes with a “use it or lose it” clause. You forfeit anything left in the account at the end of the year. With an HSA, the money rolls over every year and your account grows.
One advantage FSA does offer is availability of funds. The account relies on recurring payments pulled from your paycheck. The FSA makes the entire annual benefit available immediately.
Save for Retirement
A health savings account puts away money for your retirement. As the balance accumulates, you can invest it in an interest-bearing account. The interest is tax-free as well.
A lesser-known perk is a one-time transfer from an IRA to your HSA. There are rules. Your HDHP must be active and remain active for a one year testing period. You can transfer from a traditional IRA or a Roth IRA. (See which type best meets your retirement goals.)
You don’t have to fund your account by yourself. An employer can make contributions, so can your family members. Your spouse can kick in too, but only if they don’t have their own HSA.
There is no such thing as a joint health savings account. Both spouses can have an account if they have separate HDHPs. They can pay for each other’s medical expenses but can only donate to their own.
The money you put in an HSA remains yours. Whether you change jobs or switch to a different HDHP, the money is still sitting in your tax-free account. Once you’re over 65, you can use the money for anything you want.
Before you hit that milestone, qualified medical expenses are the rule. Pull out the money for another reason, there’s a 20% penalty and the withdrawal is taxable income.
Easy to Manage
A health savings account provides a debit card. A debit card means your transactions are tracked electronically. Every withdrawal is documented in your bank statement. Those piles of paper receipts aren’t your only record.
Your debit card can be used at a pharmacy or to pay a doctor’s invoice. It’s a way to manage all your medical expenses.
To sum up, there are significant advantages to having an HSA. Now, here is a list of the Cons.
High Deductible Required
This is not optional. The reason an HDHP offers low premiums is because the deductible is so high. The deductible limits for HSA are much lower than those on most HDHPs. Often deductibles are so high, you pay premiums for insurance you can’t afford to lose. Even with HSA, a major medical expense is devastating.
Banks have gotten into the business of debit cards for government programs. It’s the norm for states to pay fees on SNAP cards or Medicaid. But for HSAs, the cost comes to the consumer. The bank charges monthly maintenance fees or transaction fees to use the card.
An HSA pays for medical expenses. If you need to use it for anything else, there is a 20% penalty. On top of that, the amount you withdraw is taxable income.
Because the money rolls over each year, the amount you save will grow. Especially if it’s been invested. It might be tempting to pull some out, but it isn’t smart. Stick it out until you turn 65.
Is an HSA Worth It?
We would argue it is – especially if choose to insure with an HDHP. The lower premiums are sometimes the only affordable option. If that’s the case, there’s nothing to lose and everything to gain.
The cost of a high deductible plan goes beyond premiums. Many people put off necessary medical visits because they can’t cover the deductible. When they finally present, their condition has escalated. The cost of treatment soars beyond the deductible.
An HSA makes sense:
- Helps to cover medical expenses
- Grows over time.
- Lowers taxes
- Good record keeping
- Portable (moves with you)
Your health far outweighs the size of your deductible. A health savings account helps to pay for the treatment you need when you need it. Hopefully, it keeps you and your family from paying a much bigger price.
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