Healthcare is expensive for many families. Thankfully, there is a way to save some money by using an HSA (Health Savings Account). What is an HSA? This guide will help you understand how Health Savings Accounts work & save you money in the process.
What an HSA Isn’t
Before we go into what is an HSA, let’s first clear up a few misconceptions of what isn’t a Health Savings Account.
- An HSA isn’t an alternative to an insurance plan. In fact, you need to have a high deductible insurance plan to qualify for an HSA.
- HSAs and FSAs are not the same product. While it’s very easy to confuse the acronyms (HSA & FSA), Flexible Spending Accounts (FSAs) require all contributions you make in a calendar year to be used that year or the funds expire. HSA contributions never expire.
- Your current HSA is not tied to your job. This means that if you are already contributing to an HSA and you switch employers, you get to keep your money. It doesn’t disappear like some other medical savings accounts.
- Not every HSA transaction is tax-free. Only qualifying medical expenses (which is most medical, vision, and dental-related expenses) are tax-free. HSA funds spent on non-medical purchases will be subject to a tax penalty.
What is an HSA?
Now let’s go over what exactly is an HSA.
You can think of an HSA as a “Medical 401k.” All contributions are made pretax just like your retirement 401k plan. Except, all HSA contributions can be redeemed tax-free for medical, dental, and vision expenses. It can be an easy tax deduction that will save you money twice as the initial pretax contribution lowers your taxable income & the tax-free withdrawal makes it free money (minus the time to earn it).
If you have an HSA, you can use your funds to pay for doctor visits, prescriptions, and medical supplies until you reach your annual plan deductible. This means a single person can potentially pay up to $6,550 and a family can pay up to $13,100 in out-of-pocket expenses with HSA dollars until the insurance provider begins paying all in-network costs.
As you might contribute more money in a year than you actually use, don’t worry. An awesome benefit of HSA plans is that your unused contributions rollover infinitely. Even if you contribute when you are 20 and don’t use the money until you retire 40 years later.
Qualifying for an HSA
To qualify for an HSA, you need to belong to a high deductible insurance plan. The IRS defines a high deductible plan as having an annual deductible of at least $1,300 for single people and $2,600 for families.
If your deductible is higher than either of these two amounts, you qualify for an HSA.
Some employer insurance plans include HSAs. For plans that don’t, you need to shop around. You can visit HSA Bank, but, many local banks & credit unions also offer plans. You need to keep an eye on fees as some HSA providers charge monthly maintenance fees that can eat into your account balance. And, some funds allow you to invest in aggressive funds that are better for building your balance to use in the future not three months from now to pay for braces.
Annual HSA Contribution Limits
There is a limit to how much you can contribute to an HSA each year.
2017 HSA Contribution Limits
- Single Plans: $3,400
- Family Plans: $7,750
2018 HSA Contribution Limits
- Single Plans: $3,450
- Family Plans: $6,900
Participants 55 or older can contribute an additional $1,000 “catch-up” contribution each year.
Spending your HSA Contribution
Remember that unlike other tax-advantaged medical savings accounts (FSAs, HRAs, etc.), your contributions don’t expire each year. They continue to rollover for your entire lifetime. Don’t go on a spending spree in December because your account balance will return to zero in January.
Here is a short list of eligible HSA expenses:
- Exam & Lab Fees (Medical, Dental, & Vision)
- Athletic Braces & Support
- Prescription Medication
- Prenatal Vitamins
While you can’t use HSA contribution to pay your regular monthly insurance premium, you can be reimbursed for the following type of insurance payments:
- Long-term care insurance
- Health Care Continuation Coverage (COBRA)
- Health Care Coverage while receiving state or federal unemployment benefits
- Medicare & other healthcare coverage once your turn 65 or older (excludes premiums for supplemental policies)
If you can’t get an HSA, an alternative can be a Flexible Spending Account (FSA) if your employer offers this instead. The one primary downside to FSAs is that your contributions are “use it or lose it.” They are great if you know you will have planned medical expenses like dental work, renewing your contact lens prescription, or a quarterly trip to the allergy doctor.
You can also decide not to do an HSA or FSA altogether. If you are healthy or don’t have the additional money to contribute, you can pay for everything out of pocket. Although, you won’t get any tax savings.
Related Article: You can give these other money-saving healthcare tips a try as well!
Now the next time somebody asks, “What is an HSA?,” you will be able to tell them. Health savings accounts are probably the best option to save for future healthcare expenses. All contributions are truly tax-free & the money never expires. As we all visit the doctor periodically, you will be able to benefit from an HSA.