Health Savings Accounts (HSAs) are another common acronym thrown out in the healthcare world. An HSA is a type of savings account that lets you set aside money on a pre-tax basis on qualified health expenditures.
How Do I Qualify for an HSA?
To qualify for an HSA you must be enrolled in a High-Deductible Health Plan (HDHP). For 2019, an HDHP is a plan with at least a $1,350 deductible for individuals and $2,700 deductible for families. High-Deductible Health Plans do not make much use of copayments, meaning you will pay a higher price for routine doctors visits but they also have lower monthly premiums. Most HDHPs were designed for those who are relatively healthy and don’t have regular, expensive medical costs (primarily, this means millennials are most likely to use them).
How Does an HSA Work?
Think of HSAs as you would your savings account with the bank. These are dollars that are set aside to be used for medical-related costs. An HSA holder will be issued a debit card that can be used to pay for things like dental exams, new glasses, doctors office visits, etc. All purchases made through an HSA are tax-free.
There is a limit to how much you can contribute to an HSA each year. For 2019 the limits were $3,500 for individuals and $7,000 for families. Those over the age of 55 can contribute an additional $1,000 annually to an HSA. Funds in an HSA rollover from one year to the next if you leave them unused.
Can I Use an HSA as an Investment Opportunity?
Some HSAs might be invested into growth opportunities making them powerful saving tools. Any value earned from these investments are also tax-free.
People have argued that HSAs could function similarly to a 401K since they can be used on any type of purchase (not just medical) after the age of 65. Also, depending on the company, your employer might match contributions to an HSA, further enticing employees to direct money to their HSA.
A note, though: if you use an HSA on a non-medical related expense after 65 you will pay income tax. And, if you’re under the age of 65 and use your HSA for non-qualified expenses, you’ll pay a 20 percent penalty.
Should I Get an HSA?
Well, that depends. Many people who have HSAs have seen numerous benefits from them. In addition to being tax-free, they can help take the stress out of unexpected medical expenses. Spread over a fair amount of time, expensive and routine medical expenses could be covered by an HSA.
26-year-old Katie McCue has had an HSA for four years. She says:
“In that time, I have not had to pay for any medical expenses out-of-pocket. That has included an ER visit and many orthopedic services.”
However for those who have chronic conditions with expensive treatments, HSAs may not be as advantageous of a choice. Since you must have a HDHP to qualify for an HSA, you might prefer a health plan with a lower deductible. To help you decide, you could do what McCue does when deciding between healthcare plans:
- Compare the annualized premium for each of the plans available;
- Look at the varying deductible levels;
- Check whether your employer contributes to an HSA and to what extent; and
- Calculate your predictable medical costs.
How Is It Different From a Flexible Spending Account (FSA)?
A Flexible Spending Account (FSA) is also an account that allows you to set aside pre-tax money into an account to be used for certain health costs. Like an HSA, there are limits to the amount of money you can save in an FSA. For an individual it’s $2700. If you have a spouse, he/she can contribute an extra $2700.
Unlike HSAs, though, FSAs don’t have to be tied to a HDHP. Additionally, FSAs have a “use it or lose it” factor. Employers can offer one of two options:
- Allow a grace period of 2.5 months after the end of the year to use the FSA funds.
- Allow the FSA holder to roll over a maximum of $500 into the next year.
HSAs can be rolled over year after year, with no limit on how much can be rolled over. Again, depending on the type of health plan you enroll in (HDHP or another type) can help you to decide if an FSA is the right option for you.
The Future of HSAs
HSAs have grown significantly in popularity over the last decade. It’s estimated that more than 20 million Americans have benefited from using an HSA. Pending legislation could even further incentive many others to enroll in an HSA.
Like McCue, other millennial professionals are helping to drive the popularity of HSAs. Tyler Bowers is 24-years-old and has had an HSA for two years – and he doesn’t anticipate changing that anytime soon. According to Bowers, he doesn’t plan to move off his HSA “as long as it’s an available option and [he does] not expect any major medical expenses in the next health plan year.”
Taking the Next Steps
Take a look at your current insurance coverage to see if it’s compatible with an HSA.
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