I have mentioned J.L. Collin’s book, “The simple Path to Wealth” that I recommend you all to read to have a basic understanding of your financial life. Today, I will be diving deeper into one of the many topics he spoke about: Health Savings Accounts.
Simply said, it’s a savings account for your healthcare expenses with some benefits.
By definition: it’s a type of savings account that you add your pre-taxed money (i.e. your gross income) to pay for qualified medical expenses* (*qualified medical expenses are written in your insurance plan). You can use your pre-tax money to pay for deductibles, copayments, co-insurance, routine medical costs and you may be able to reduce your out-of-pocket costs for other health care expenses. In general, you normally can’t use an HSA to pay your health insurance premium (A premium is your monthly service fee to the health insurance company). An HSA account goes wherever you go so it is not dependent upon being employed by a company. You do have yearly contribution and catch-up contribution limits that increase yearly. It's always important to read your insurance plans and their benefits and restrictions.
Who are HSAs for?
These are good for anyone who also wants tax efficient healthcare coverage for medical expenses and has an HSA-eligible High Deductible Health Plan (HDHP).
An HDHP plan is often a health plan (including a Marketplace plan) that has a higher deductible and lower monthly premium. This means, you would need to pay first before your insurance company starts to cover your medical costs. HOWEVER, if you have an HDHP and money in your HSA, your HSA will pay your deductible, thereby making the qualified medical expense completely free for you. An HSA may earn interest or other earnings, which are not taxable. Banks, credit unions, and other financial institutions offer HSAs.
Another option are the Health Flexible Spending accounts (HFSA). The HFSA accounts are similar to an HSA with a few differences. With an HFSA, you use the money or you lose it. It does not roll-over into the next year for you to use towards qualified medical expenses. It is also an account owned by your employer. If you HAVE NOT enrolled in COBRA (Consolidated Omnibus Budget Reconciliation Act- Continuation of Health Coverage (COBRA) | U.S. Department of Labor), all the money in your HFSA will stay with your employer. Although, if you have enrolled with COBRA, you will retain your money. With an HFSA, you are not required to have and HDHP but you also don’t earn interest in your account like an HSA. Both HFSA and HSA accounts are funded by you and/or your employer’s contributions. There are other variations of an HFSA account for you to research to find out which one is best for your own personal situation.
Benefits of HSA:
Tax Advantage Account: Deposits from you and/or your employer are federally tax-free and pre-tax. As long as you are using the funds for qualified medical expenses, your withdrawals are tax-free.
No Nonmedical penalty after age 65. The nonmedical expenses you have from 65+ are taxable but you won’t have to pay the tax penalty.
Unlike and HFSA, your balance in an HSA will roll-over every year regardless of how much you’ve used or contributed. You never lose your money.
No minimum deposit required to open and HSA.
You can invest it! You can invest your balance into stocks, bonds and other securities and the earnings are tax-free that you can use towards your qualified medical expenses. Check with your HSA provider to learn if you need to have a minimum balance in order to begin investing.
You can take the account with you no matter where you work.
Can be used to pay for qualified medical expenses of your spouse and dependents.
Can be used to offset the Medicare plan premiums after retirement (but not with Medigap/Medicare Supplement policies. Certain taxes and fees may apply).
Make payment transfers easily.
Cons of HSA:
They don’t cover your monthly/yearly Health Insurance Premium fee. There could be exceptions if you are unemployed.
Non-medical 20% tax penalty imposed AND income taxed by the IRS before age 65. The reason for this is because the money that is not used towards qualifying medical expenses is seen as taxable income.
If you forget to stop your HSA contributions 6 months before taking your social security payments, you may need to pay tax penalties.
If you are a dependent on someone else’s tax return, you’re can’t own an HSA.
Not all stores accept HSA cards so you will have to get a reimbursement from your HSA.
The cut-off age for contributions is 65 years old. You can’t contribute to an HSA after you’ve reached the Medicare age of 65.
Do we need them?
You don’t need to have one but I would recommend getting an HSA to receive the most benefits if you already qualify for an account. If you don’t qualify for an HSA, NO PROBLEM!! A low deductible plan might be the best option for you while you invest separately. The most important thing is to have the health care plan that works best for YOU and YOUR FAMILY! If you decide to get an HSA and maximize your benefits, you will enjoy reaping the rewards of a savings account that will save you in an emergency. I had an HSA account in the past and it really did help me out with my medical bills after being laid-off and in between jobs. In my opinion, an HSA is a good, long-term healthcare option to have. You may need to pay taxes on your non-medical purchases with the HSA funds after age 65 but if you have saved and invested enough money in your HSA account, this can work out in your favor to aid you in your retirement. Many people often use HSA in addition to their 401k and/or IRA. Even if you don’t do anything but contribute to your HSA account, it will always be there for you when you need it! You can C.Y.A with an HSA (C.Y.A. = Cover Your Ass). Check with your employer and/or health care provider to see if they offer Health Savings Account options with their health insurance plans. You may be able to get more advantages.
High Deductible Health Plan Insurance Options for HSAs to get you started:
Welcome to the Health Insurance Marketplace® | HealthCare.gov Just follow the prompts to see the options available to you in your area.
Health Savings Account | HSA Benefits | Fidelity Investments
Useful Health Insurance Terms:
*Deductible: the amount of money you pay for health services before the insurance company starts to pay the expenses. Example: A deductible of $100 means you will pay $100 and the insurance company will pay for everything above the $100 deductible.
*Premium: Your monthly or yearly payment fee for health coverage. The higher your deductible is, the lower your premium will be. The lower your deductible is, the higher the premium will be. Example: $1000 deductible = $50/month premium. $50 deductible = $300/month premium.
*Open Enrollment: A time each year, usually in the Fall/Autumn, when you can begin, change, modify or cancel your healthcare insurance plan. The changes will start the following calendar year (example: Open Enrollment for 2024 to have benefits in 2025).
Sources & Links for More Information:
Affordable Healthcare Act Plans: How to get insurance through the ACA Health Insurance Marketplace | USAGov
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