What Is a Health Savings Account?

    Pros and Cons for Families

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    More and more employers are offering health savings accounts (HSAs) as part of their employee benefits package. This savings account allows you to set aside money to pay for qualified medical expenses incurred during the year income tax-free.

    The Upside to an HSA

    Two big benefits of an HSA are the ability to contribute pre-tax money to an account that grows tax-free and the fact that your contributions can remain in the HSA year after year.

    What medical expenses can you pay for with an HSA? The list of qualified medical expenses is actually pretty long, and includes co-pays, prescription medicines (including insulin), medically necessary contact lenses, and hospital expenses for that impromptu ER trip with your 8-year-old.

    Medical expenses that are not covered include cosmetic surgery, health club dues, and, among other items, illegal surgeries. The IRS has a long list of qualified medical expenses – you can Google it.

    In order to fund an HSA, you must have a high-deductible healthcare plan and be under age sixty-five. The IRS defines a high-deductible healthcare plan as one where the minimum deductible for a single worker is at least $1,350, or $2,700 for a family in 2018. Your employer’s healthcare plan may require a higher deductible.

    Just because your health plan has a high deductible does not automatically qualify you to use an HSA. The IRS also dictates a maximum limit on the total out-of-pocket expense and annual deductible to qualify as a high-deductible healthcare plan. In fact, some of the high-deductible plans offered on the exchanges in the Richmond area do not qualify for HSAs. Be sure to confirm your health plan’s eligibility for an HSA before signing up.

    The good news about an HSA is that an employer can contribute funds to your HSA on your behalf. For 2018, the max contribution (employer-employee combined) is $3,450 for an individual, or $6,900 for a family. There is a $1,000 or higher annual “catch-up” for those ages fifty-five and up.

    Typically, your employer will partner
    with an HSA provider (which is very convenient), but you don’t have to use that provider. There are many HSA providers, so be sure to check into what kinds of fees are charged on those accounts. Ask your local bank or financial planner, or look here: hsasearch.com/compare.

    The Downside to an HSA

    The biggest risk with an HSA actually revolves around the high-deductible healthcare plan you have to have in place in order to use an HSA. Consumers may be surprised at the high cost of medical care when they have to pay out-of-pocket. This sometimes leads consumers to avoid going to the doctor or filling prescriptions, and that can lead to larger health care expenses down the road.

    Some high-deductible health plans
    (such as those sold on the exchanges) cover certain preventative care at no charge. Read your plan details to find out what your plan covers. If you choose to use an HSA and high-deductible healthcare plan, then you really need to be able to deposit a fair amount of money in the HSA.

    The Best Way to Use an HSA

    Ideally, you would max out your savings in an HSA and then pay for your medical expenses out-of-pocket so your money could grow tax-free. HSAs are great for people with low medical expenses who can afford to set aside a decent amount of money in an HSA. In fact, you can actually keep money in an HSA and use it in retirement. The earnings in the HSA are tax-free as long as they remain in the HSA and are used to
    pay for qualified medical expenses.

    In fact, after age sixty-five, the money in an HSA can be used for anything without the 20 percent penalty. However, even after age sixty-five, if you withdraw money from your HSA for something other than qualified medical expenses, you will owe income taxes on the withdrawal.

    An HSA is “triple tax preferenced,” which means your income is deposited pre-tax into the HSA, grows tax-free within the HSA, and can be withdrawn tax-free for qualified medical expenses. Be sure to keep good records and check with your tax advisor to see if your expenses qualify.

    Should You Choose an HSA?

    In reality, most people are not using these accounts as long-term savings. Many people fund HSAs with some money for the year and then hope their medical expenses are less than what they have saved in the HSA. Assuming you have a choice in the matter, you need to have a higher tolerance for risk to participate in a high-deductible health plan in the first place. By its very nature, you could end up saving money or you could end up spending a lot more money out-of-pocket versus a traditional health insurance plan.

    If you are considering using a high-deductible health plan and HSA, be sure that you can actually set aside the difference in the deductible (compared to a PPO) in the HSA. If you can’t afford to set aside money in an HSA, then you probably need to look at another healthcare plan. For consumers who have a choice, choosing a high deductible healthcare plan solely to save money on your monthly premiums and skipping the contributions to an HSA is not a recommended strategy.

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    Lauren Zangardi Haynes
    Lauren Zangardi Haynes CFP(R), CIMA is a fee-only financial planner with Evolution Advisers in Midlothian. She has three kids (ages seven and under) and an elderly miniature schnauzer. Lauren is also the founder of a personal finance blog for families with kids at home called Words on Wealth.