Beginner’s Guide To The Health Savings Account

Before three years ago, we never had any medical bill debt.  Hospitals were foreign to me, and I knew *nothing* about mental illness.

All of this changed on that snowy night when I learned that my daughter was struggling with severe depression.  Since then, I have become much more familiar with therapies, medications, health insurance, hospitals, and medical bills.

If not for this experience, I would probably not have the appreciation I have for our health insurance coverage and the health savings account that’s tied to it.  In fact, I would guess that I would be pretty ignorant about it all.

Today, I am so, so thankful for having good insurance.  We would have never guessed three years ago how much we would rely on adequate coverage to help save our daughter’s life.

You just never know when your journey is going to take a hard left.

I also have a level of empathy now for those who don’t have the insurance or the money to get the help they need.   I’ve seen too many families get discharged from therapy just because their insurance ran out.  This doesn’t seem fair.

This is just one reason I think the HSA (Health Savings Account) is an excellent resource to help protect you from unexpected medical expenses.  With an HSA, you can save pre-taxed income for future health care costs – with no deadline or expiration.  The money remains yours even through changes in insurance, enrollment cycles, and employers.

Of course, there are qualifications you have to meet to enroll in an HSA.  In addition to benefits, there are also some disadvantages.  Also, there are circumstances when an HSA might not be the best choice.

With that in mind, read on to learn more about how an HSA works and if it’s right for you.


What Is An HSA?

A Health Savings Account is a tax-favored account used to invest savings for future qualified health care expenses.  Think of it as an emergency fund for medical bills.

Unlike a Flexible Spending Account, you can invest your HSA savings, and you don’t have to deplete the account by the end of the year.  This means you can use an HSA as an investment vehicle that will support you into retirement.

Besides that, the tax advantages are practically unbeatable:

  • contributions are pre-taxed
  • after-tax contributions can be deducted from your gross income
  • the savings grow tax-free
  • withdrawals are not subject to federal taxes if used for qualified expenses
  • deductions lower your taxable income, which can push you into a lower tax bracket

Opening up an HSA is probably starting to sound like a no-brainer, right?  However, there are some qualifications you must meet first, and some drawbacks.


How Do You Qualify?

There are a lot of advantages to having an HSA.  Unfortunately, not everybody qualifies to have one.

The main requirement to participate in an HSA is having a qualifying high-deductible health plan (HDHP).  What this means exactly has the potential to change from year to year, but for 2019 it means this:

A health insurance plan with a deductible of AT LEAST $1,350 for individual coverage, or $2,700 for family coverage.

If your health insurance plan has a deductible less than these amounts (depending on individual or family coverage), you are not eligible to participate in an HSA.

Also, if you do have a qualifying HDHP, the out-of-pocket amount cannot exceed a specified threshold.  Again, this amount can change in the future, but for 2019 the threshold is $6,750 for an individual plan and $13,500 for family coverage.

Here are the additional requirements for enrolling in an HSA:

  • you cannot be covered under another health plan that is not an HDHP
  • you cannot be covered under Medicare
  • you cannot be dependent on someone else’s tax return
  • you must be at least 18

HSAs are usually offered with a qualified health care plan through an employer, but there are other ways to enroll.  If you are self-employed, or are responsible for finding your own health insurance, you can enroll in an HSA through other sources.  These include banks, brokers, credit unions and insurance companies.


Benefits Of Having An HSA

There are a few benefits I’ve already mentioned, such as the tax advantages stated above.  But there are several more great reasons to enroll in a Health Savings Account.

You can use your HSA to cover out-of-pocket costs required by an HDHC, and there are many expenses that qualify.  These include deductibles, dental, vision, prescriptions, co-pays, therapies, mental health, medical equipment, hospital and lab fees, and more.  For a complete and updated listed, you can visit the IRS website and read the latest version of IRS Publication 502.  *Insurance premiums are typically not considered a qualified expense.

Almost anyone can contribute to your HSA.  This includes your employer, your spouse, a relative, or even a generous donor.

You can use the HSA funds for dependents not covered by insurance.  Generally speaking, qualified expenses include those not reimbursed to the account holder, spouse, and family members.

Any balance rolls over to the next year, so you never have to deplete the funds by a deadline.  All the savings in an HSA are yours forever – even if you switch insurance plans, change employers, retire, etc.

In the unfortunate event of an untimely death, you can transfer the HSA to your surviving spouse.  *Just make sure you have completed any required beneficiary forms.

Most HSA plans provide a debit card for convenience.  This makes it super easy to make online payments to healthcare providers.

You can have more than one HSA.  There is no limit to how many accounts you have.  The only limit is how much you can contribute on an annual basis.  If you have more than one account, the sum total of all contributions still cannot exceed the current maximum set by the IRS.

So why would you have more than one?  One reason is due to another benefit:  you can invest the funds in your HSA once you reach a minimum balance.  Different HSAs have different investment options, so you may choose to enroll in one you favor more, but still want to have an HSA through your employer because of the additional contributions your employer makes.

There are no income limits with an HSA.  Your annual salary does not determine whether or not you qualify.

Another benefit is that you can use HSA funds for non-qualified expenses after 65 without a penalty.  This benefit applies even if you’ve enrolled in Medicare.  *However, you’ll still need to pay normal income taxes for any non-medical usage.

If you’re wondering how you’ll find money in your tight budget to contribute to an HSA, take heart in knowing that HDHPs have lower premiums.  You can use the money you save on a high-deductible plan to make your contributions.


How To Fund Your HSA

The best way to contribute to your HSA is automatically.

You can have it deducted from your paycheck through your employer, or set up automatic transfers through your bank account.  The first option will allow you to make pre-tax contributions, so go this route if you can.  Otherwise, your after-tax contributions can be deducted from your income when you file your taxes.

Of course, you can always send a check, but this takes effort and time.  And when it comes to saving money, you may not be disciplined to spend the effort or the time.

Another way to contribute is by transferring funds from other savings accounts, like a separate HSA, or an IRA.  *At this time you cannot transfer from retirement plans like a 401k.

Some employers will even make contributions to your HSA.  My husband’s employer puts in a nominal amount weekly, but every little bit helps.  Check with your company’s HR department to see if you can also receive this benefit.


Restrictions To Be Aware Of

Besides the deductible minimums and out-of-pocket maximums, there are a few other restrictions with the HSA.

One is that you can only spend your HSA funds on qualified medical expenses.  This generally means the expense must be used to prevent or treat a physical or mental illness.  So, for example, you can’t use the money for strictly cosmetic procedures, or over the counter personal care products like toothpaste, make-up, etc.

Any withdrawal not used for a qualified medical expense is subject to income tax and a 20% penalty, so be careful how you spend this money.

Also, there is a maximum you can contribute pre-tax annually.  For 2019, that maximum is $3,500 individual and $7,000 family.  However, if you’re over 55, you can make a catch-up contribution of up to $1,000 extra a year.

Keep in mind that these amounts include any contributions made by your employer.  Any contributions over these amounts will incur a 6% tax and not be tax-deductible.

Another limitation is you can only make contributions in cash.  So, that means you can’t contribute stocks, bonds, mutual funds, property, etc.

If you discontinue enrollment in an HDHP, or if you get secondary insurance that is not an HDHP, you can no longer make contributions to your HSA.  However, the funds in the account remain yours forever and you can continue using them for qualified medical expenses.

One of the great advantages of an HSA is that you can keep your HSA funds through any circumstance and at any age.  But once you have signed up for Medicare Part A or Part B, you can no longer make new contributions.  This is because Medicare is a non-HDHP.


When An HSA Might Not Work For You

Even with all the restrictions, I still think the HSA is a great financial vehicle to save money for medical expenses.  Especially because health care costs will inevitably increase, and out-of-pocket costs will likely rise due to deteriorating health as we get older.

However, there are circumstances when it’s not the best fit for your situation.

Signing up for an HSA will require you to meet a high deductible, which might be too much of a financial burden for you.  If you or anyone in your family has a chronic medical condition, you may have to pay out thousands of dollars before your coverage kicks in.  This out-of-pocket cost could prevent your ability to make any contributions.

Or perhaps you’re expecting high medical costs in the future, such as the birth of a child.  In this case, you may want to stick with a lower deductible.

If you feel like the risk of having to meet a high deductible outweighs the benefits of having an HSA, then it’s probably not the best option for you.

However, if you and your family are relatively healthy and rarely need medical attention, having an HSA could be a good idea.  You could get all the tax advantages that come with it, but probably won’t need to pay out the high deductible.

Or, if your income allows for a high deductible to not be a financial burden, you could use an HSA to help support your retirement expenses.

Either way, it’s worth doing some research and deciding for yourself.  Considering the average couple needs $280,000 to cover their health care expenses throughout retirement, you definitely want to have a plan for covering these costs.


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Doctor with stethoscope around neck with text overlay: The beginner's guide to the health savings account

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