Can an HSA Account Help You Manage Healthcare Costs?
Find out if a Health Savings Account can help you manage expenses and also save for the future.
When the time for open enrollment for health insurance comes around, one option you might be offered is an HSA account. Many people could take advantage of an HSA, but hesitate to sign up for it because they don’t understand the benefits it offers. Here’s a brief rundown.
What is an HSA account?
HSA stands for Health Savings Account, and basically, it's a savings account combined with a high-deductible health insurance plan. The money in the savings account can be used to help the account owner pay for medical costs until the annual deductible is met. After the account owner meets the deductible, medical bills are paid by insurance, while money left in the savings account earns interest.
An HSA might be an option provided by your employer, but if not, your health insurance agent can help you sign up for one independently during open enrollment.
If you’re relatively healthy and don’t need to take money out of your HSA, the balance in your savings can continue to grow. HSA accounts are the only thing in the tax code with the trifecta of money going in pre-tax, growing tax-deferred, and coming out tax-free as long as it is used for health care expenses.
You do have the option of withdrawing money from your HSA for other reasons, but – like taking money out of your 401(k) – there’s a 20 percent penalty to be paid if you’re under age 65, and you will also have to pay taxes on the amount withdrawn. So, make sure your budget includes enough room for an HSA contribution each paycheck, and understand the rules of using it for the purposes intended.
If you’re over 65, and you contributed to an HSA earlier in your life, you can use the funds in your HSA to supplement your retirement income without incurring an early-withdrawal penalty. You will still have to pay income tax on money withdrawn for non-health-related purposes, but it will be no worse than if you were making withdrawals from an IRA or 401(k). Health concerns, of course, become more prevalent at this stage of life, so having money that can be used tax-free for health expenses can be a big advantage.
Pros of an HSA
There are both positives and negatives to HSAs. On the pro side, contributions are tax-deductible and withdrawals for qualified medical expenses are tax-free. Earnings are also tax-free.
Contributing to an HSA is also convenient, because you can set up automatic deductions from your paycheck to go directly into it. Your employer may make a contribution to your HSA each paycheck as part of your benefits plan. Money can also be accepted as a gift by individuals who wish to help you with medical expenses, though they will not receive tax benefits if they do have a high-deductible health insurance plan.
As Investopedia explains, "Contributions made through payroll deposits (through your employer) are typically made with pre-tax dollars, which means they are not subject to federal income taxes. Your employer can also make contributions on your behalf, and the contribution is not included in your gross income."1
HSAs typically come with a debit card, which makes paying for qualified expenses convenient, which is another plus. And if you change jobs or health insurance providers, your account will remain intact and you can continue to use it.
Cons of an HSA
On the not-so-positive side, you do need a high-deductible health plan to qualify for an HSA. High-deductible plans are not the best fit for everyone, so before choosing a plan, be sure to consult with your employer’s benefits department or with your insurance agent. If unexpected health issues arise before you’ve met your deductible, you may be caught off guard if you haven’t yet saved enough in your HSA to pay for the medical bills.
As noted, a withdrawal for non-qualified spending is taxable and comes with a 20 percent penalty before you turn 65, and it is still taxable after age 65.
There may be fees associated with your account, including a per-withdrawal fee or even a monthly maintenance fee, but that's not always the case.
Note the limits that are associated with HSAs.
Before you sign up for an HSA, it's a good idea to make sure you understand the terms and limits.
According to CBS News, "The 2018 annual contribution limit that individuals with single medical coverage can contribute to a health saving account is $3,450, an increase of $50 from 2017. The annual HSA contribution limit is $6,900 for those covered under qualifying family medical plans (up from $6,750 in 2017). But if you're 55 or older in 2018, you can contribute an additional $1,000, or total of $4,450 to an HSA for singles and $7,900 for families per year."2
What counts as a qualified expense?
Before you sign up for an HSA, you'll need to note what actually counts as a qualified expense so you know what you can make tax-free withdrawals for. The list, which is quite extensive, can be accessed at HSAcenter.com.3 Things the list does not include are: controlled substances, cosmetic surgery, electrolysis, hair transplants, health club memberships, and nutritional supplements, among others.
Knowing your options beforehand can help you make the best choice for yourself and your family. Find out if an HSA can help you manage healthcare expenses and save for the future.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Nevada State Bank, a division of ZB, N.A. Member FDIC