HSAs provide a way to pay for health care costs. If you’re one of the millions of people in the U.S. who have a high-deductible health insurance plan, you should consider opening a health savings…
HSAs provide a way to pay for health care costs.
If you’re one of the millions of people in the U.S. who have a high-deductible health insurance plan, you should consider opening a health savings account, says Steve Christenson, executive vice president of Ascensus, the nation’s largest retirement, college and health savings plan provider. HSAs are accounts that people with high-deductible plans can use to pay for a wide array of health care expenses not covered by insurance, ranging from chronic conditions like depression and heart disease to surgery. “With more than 22 million HSAs across the country and counting, consumers are experiencing how these accounts can benefit them in both the long- and short-term,” Christenson says. Here are eight things you should know about HSAs:
1. HSA eligibility depends on your health care plan.
To be eligible for an HSA, you need to have health care coverage that has a deductible of at least $2,700 for a family plan and a minimum of $1,350 for an individual plan, according to Internal Revenue Service guidelines. The plan must also have maximum out-of-pocket expenses of $13,500 for a family and $6,750 for an individual, after which the policy covers costs.
2. There are three ways to contribute to an HSA.
An HSA works in some ways like a regular savings account. During open enrollment, you decide how much you want to contribute to your HSA. In 2019, the annual contribution limit will be $3,500 for an individual and $7,000 for a family. (HSA account holders who are 55 and older can contribute an additional $1,000 annually to individual and family plans.) Some employers contribute to their workers’ HSAs. In 2017, 21 percent of the funds contributed to HSAs were from an employer; the average employer contribution was $604, according to Devenir’s 2017 Year-End HSA Market Statistics & Trends Executive Summary. Devenir is an HSA investment solutions provider and also publishes research on HSA trends. You can directly contribute to your HSA outside of your payroll, as well, an option used by people who set up their account through a bank or credit union. Finally, you have a one-time option of transferring funds from an IRA to an HSA to fund that account without tax penalties.
3. HSAs can help pay for a wide range of health care costs.
HSA funds can be used to pay for a large number of health services and products, says Kim Buckey, vice president of client services for DirectPath, a company that provides personalized health benefits education and enrollment services to large employers. The federal government approves about 300 eligible expenses. These expenditures range from deductibles and copays to out-of-pocket costs for dental visits, prescription eyeglasses, hearing aids, lab fees, substance misuse treatment, massage therapy, prosthetics, lead-based paint removal, weight-loss programs, surgery, fertility enhancement and psychiatric care. To check on which expenses are eligible, go to irs.gov and search for IRS Publication 502. Some websites, like HSACenter.com, also provide lists of HSA eligible products and services.
4. Owning an HSA provides great tax benefits.
In addition to providing funds to help pay for a raft of health care services and products, HSAs help you save money on taxes a couple of ways, Buckey says. If you contribute to your HSA through payroll deduction, those funds are deducted from your pay before federal (and typically, state and local taxes) are withheld, she says. This reduces your taxable income and, therefore, the amount you pay in taxes. Also, the money in your HSA grows tax-free; you don’t have to pay taxes on the interest or investment earnings on the funds in your account. “And, as long as you use the money in your account for eligible expenses, you won’t have to pay taxes on the funds when you withdraw them,” Buckey says. But if you use any portion of your HSA funds for purposes other than qualified medical expenses, that money is taxable as income, and the amount you withdraw is also subject to a 20 percent penalty. Once you reach age 65, you can use the funds for any purpose without incurring that penalty. So if you withdraw $100 to pay for something other than an approved health care expense. you’ll be taxed $20, and the funds will also be taxed as income for that calendar year.
5. HSAs are convenient to use.
Most HSAs provide account holders with debit cards they can use to access their funds, Christenson says. “As long as the payment is going toward a qualified medical expense, savers can use their HSA debit card to pay for doctor’s visits at the time of the appointment or for other medical purchases, like prescriptions,” he says. “Savers can also use the debit card to withdraw cash from an ATM to reimburse out-of-pocket payments made for qualified products or services.”
6. HSA benefits widen when you reach age 65.
Once you reach age 65, you can use the funds in your HSA for any purpose without incurring a 20 percent penalty for withdrawal, says Drew Kellerman, founder of Phase 2 Wealth Advisors in Gig Harbor, Washington. The firm provides financial planning and investment strategies. “With some long-range planning, your HSA can take on a whole new dimension after age 65, providing you with tax-free funds for a wide array of medical and long-term care expenses,” he says. Once you reach age 65, you can, for example, use HSA funds to pay for Medicare Parts B and D premiums. It’s important to keep in mind, however, that if you use HSA funds for something other than a qualified health expense — to pay for a home renovation, for instance — those funds will be taxed as income, Kellerman says.
7. Your HSA can be an investing tool.
While HSAs are a good way to cover immediate health care costs not paid for by insurance, they can also be used to save and invest money for the future. “HSA owners have the ability to move from spenders to savers to investors, creating a long-term nest egg,” Christenson says. If you want to use your HSA to save money, you can contribute more funds to the account than you need to cover your year-to-year health care expenses, and let the money accrue tax-deferred. Some HSAs allow you to invest in mutual funds, the same way you’d contribute to a 401(k) or an IRA. “Many HSA providers offer an online investment option that allows the plan holder to transfer HSA dollars directly into an HSA investment account account with a select number of mutual funds to choose from,” Christenson says. These providers may require you to have a minimum amount of funds available in cash in case you need the money to cover a near-term health expense, like treatment for alcohol misuse. If you’re unsure about whether you’re ready to use your HSA as an investment tool, talk to a tax professional or investment adviser who’s well-versed in HSAs. The number of people who are using their HSA as an investment tool is growing rapidly, according to Ascensus data. HSA investment assets were more than $8 billion at the end of 2017, an increase of 51percent over the previous year.
8. If you’re not eligible for an HSA, you might consider an FSA.
If you don’t have a high-deductible health insurance plan and therefore aren’t eligible for an HSA, you may want to consider starting a health care flexible spending account, a benefit many employers offer, Buckey says. FSAs let you set aside money on a pre-tax basis to pay for eligible health care expenses throughout the year. For instance, you can use FSA funds to pay for acupuncture, chiropractic care, crutches, canes, walkers and non-cosmetic surgery. Currently you can contribute a maximum of $2,650 annually to an FSA (the amount can change year to year). These accounts differ from HSAs in a couple key ways: Unlike HSAs, FSAs don’t belong to you, the consumer; if you establish an FSA through your employer and change jobs, you can’t take the account with you. Also, you must spend your FSA in the calendar year for which you earmarked the funds, or you forfeit the money. Some plans offer a grace period of 10 weeks to use the funds in your account; others allow you to roll over up to $500 to be used in the following year.