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Health Savings Accounts: 7 Things to Know About HSA’s

Money in a jar for health savings

Health Savings Accounts (HSAs) are a means of helping Americans save for future healthcare and medical expenses. The incentive for doing so is the money you save on costs you will have to pay anyway. First created in 2003an estimated $42.7 billion is held in over 21 million HSA accounts less than 15 years later. If you’re not sure why anyone would want a Health Savings Account, read these 7 things to know and talk to your bank or financial advisor about setting one up.

  1. HSAs save you money on medical expenses

Because HSAs allow you to set aside money on a pre-tax basis to pay for qualified medical expenses, you do not pay federal income tax on the money you deposit into your HSA. In essence, the $200 you deposit into the account escapes being depleted by the percentage (from 10-37% of your income bracket). When you spend it on qualified medical expenses, your money goes farther.

Note that if you withdraw the money for non-medical expenses you will incur penalties. If you are over the age of 65, however, you may be able to use any leftover funds tax-free.

  1. You can start an HSA if you have an HSA-eligible, high-deductible health plan

People often choose high-deductible health plans (HDHP) to save money on their monthly insurance premiums. HSAs offer an additional savings by letting you use untaxed funds to pay for health care expenses before you reach your deductible and other out-of-pocket costs like co-payments.

How do you know if you have an HDHP? To quote healthcare.gov:

“The IRS defines a high deductible health plan as any plan with a deductible of at least $1,300 for an individual or $2,600 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, co-payments, and co-insurance) can’t be more than $6,550 for an individual or $13,100 for a family. (This limit doesn’t apply to out-of-network services.)”

  1. You can open an HSA through your bank, credit union, or other financial institution

You will want to shop around for the best option. This article by “the balance” suggests you contact your banks and then speak with a broker or financial advisor to help you evaluate your options.

Questions to ask include:

  • What are the administrative charges or fees for this account?
  • Will you waive those fees while my balance is under a certain amount?
  • What is the process for withdrawing money or being reimbursed for a medical claim?
  • Will I be given a debit card to use?
  1. The money in your HSA never disappears or expires

All unspent funds deposited into the account carry over into the next year. Unlike flexible spending accounts (FSAs), HSA funds do not disappear if you don’t spend them within a certain amount of time. Unlike Health Reimbursement Arrangements (HRAs) that are set up and owned by an employer, HSAs are owned by the individual. Some plans even earn interest.

If your insurance coverage is no longer HSA-eligible, you can no longer deposit funds into the account, but the existing funds are still available for you to spend on qualified medical expenses.

 

  1. HSAs have annual contribution limits, but if you are 55 or older, you are allowed a “Catch-Up Contribution” of an extra $1000

In 2018, single holders may not deposit more than $3,450 into an HSA. Family limits are $6,900. Contributions from any source contribute to the contribution limit. The annual HSA contribution limits are posted here.

 

  1. Anyone, including your employer, can contribute to your HSA account on a pre-tax basis

If that option is not available through the employer, contributions may be made on a post-tax basis and then used to decrease gross taxable income on the following year’s Form 1040.

All deposits to an HSA become the property of the policyholder.

 

  1. You can pay LOTS of medical expenses with an HSA—including travel to the doctor, eye exams and eyeglasses, and even your healthcare premiums

According to the IRS, an expense is considered “medical” if it is “primarily to alleviate or prevent a physical or mental disability or illness.”

Examples of qualified medical expenses include annual exams, hospital services, and home care. They also include things like contact lenses, crutches, many dental procedures, chiropractor and acupuncture visits, eye exams and eyeglasses, care from psychiatrists and psychologists, and the amount you pay for prescription medicines. Over-the-counter medications qualify only if you have a doctor’s prescription.

Medical expenses also include the premiums you pay for insurance that covers the expenses of medical care, and the amounts you pay for transportation to get medical care.

Costs that aren’t covered? “…expenses that are merely beneficial to general health, such as vitamins or a vacation.”

The list of qualified medical expenses is very long, but browsing it is well worth your time. You may be surprised at some of the things you can use your HSA funds for.