Healthcare in America can often be more confusing than we would prefer it to be. There are a lot of terms we need to become familiar with, which lead to new terms we then also need to learn.
Depending on the health insurance plan you have, you might want to know what a health savings account (HSA) is. If you qualify for one, you'll need to know its importance, how much you can and should put in and the ways it can be good and bad for you.
So, what is an HSA?
What Is an HSA?
A health savings account, more colloquially referred to as an HSA, is a savings account that can only be used for certain expenses relating to healthcare. Those who qualify for an HSA do so because they are enrolled in a high-deductible health plan (HDHP), and the money you put in your account will slowly accrue interest.
You will be able to use the funds from this account on a variety of medical expenses - though depending on when you need to withdraw funds, you may incur a penalty.
How Does an HSA Work?
You qualify for an HSA if you have a high-deductible health plan. The qualification for this is if:
- Your deductible for an individual is $1,350 or more
- Your deductible for a family is $2,700 or more
- Annual out-of-pocket expenses for an individual are no more than $6,750
- Annual out-of-pocket expenses for a family are no more than $13,500
Per Healthcare.gov, if you're looking for a plan on their site it will tell you whether or not the plan qualifies you for an HSA.
Should you qualify, you're able to put up to a certain amount of funding into your HSA. If you're fortunate enough to not need to dip into your HSA, lucky for you the money transfers over from one year to the next.
Contributions to your HSA are made prior to tax, and the interest earned on the contributions currently in there are tax-free as well. This can all have an impact on your taxes; if you put some of your salary into your HSA, the fact that it's pretax means your taxable income for the year gets lowered.
What are the qualifying medical expenses that you can use your HSA to cover? It's actually a wide variety. Payments for your doctor and dentist appointments can be done via HSA, as can eye doctor appointments. Treatment to help you stop smoking can be paid with your HSA too, as can many forms of birth control. Prescriptions, psychiatric and psychological care, hearing aids and MRIs or all also among the expenses your HSA is cleared to cover.
On the other hand, make sure you also know the expenses that are not covered. Prescriptions are covered, but not every over-the-counter medication is. Many medically necessary surgeries are covered, but cosmetic surgeries generally are not (unless medically necessary). Living expenses for assisted living facilities are not covered by HSAs, and neither are controlled substances like marijuana and CBD, even if they're legal in your state.
When you need to use your HSA to pay for a medical expense, it's more convenient than it may initially sound. Your HSA often comes with a debit card connected to it that makes using the funds significantly easier. This becomes particularly convenient if you plan on using HSA funds for qualifying deductible, premium and copay costs.
For many, an HSA is reserved for emergency situations only. A big part of why is because it's meant to be used by those who are 65 or older and on Medicare. If you use funds from your HSA prior to that age, you're hit with a 20% penalty.
Advantages of an HSA
The idea of an HSA is to provide comfort in the event of a sudden medical expense, the relief of having money safely stored away for such an occasion.
The fact that everything is pretax can also turn into an even bigger advantage than it sounds. HSA contributions from your salary aren't factored into your taxable income for the year. That not only means less income subject to tax, but with the right amount you could even end up in a different tax bracket, saving you even more.
Similarly, HSA withdrawals for qualifying medical expenses also aren't subject to taxation, meaning you have more of the funding at your disposal for medical expenses.
If you withdraw for non-qualifying expenses after age 65, those withdrawals are subject to tax. But unlike if you do this prior to your qualifying age, now there's no penalty. If you're willing to pay the income tax on your HSA withdrawal, you now have more variety in how you can use it.
The health insurance industry is undeniably a confusing one, but there are a few regards where an HSA can be a little more convenient than other, similar plans and savings accounts. The account can come with a debit card or checks to make paying with it easier, and the rollover from year to year makes it much more convenient than, say, a flexible spending account (FSA). The fact that every year of your HSA isn't a "use it or lose it" situation is a major advantage.
Disadvantages of an HSA
Of course, the biggest disadvantage of an HSA is that ultimately, it's a health plan that involves entirely your own money, whether out of pocket or out of your paycheck.
Meanwhile, even before utilizing your HSA you're paying a lot out of pocket, since an HSA only comes with a high-deductible health plan. Your monthly premiums will be lower, but your high deductible and HSA is an awful lot of your own money.
If you're saving money in your HSA in the event of a medical emergency, you'll certainly feel relief that you have some funds stored away. Of course, if you encounter a real medical emergency that forces you to use the money in your HSA, will it be enough? Medical costs continue to rise, and while many forms of surgery qualify as a relevant medical expense, it may not be enough to keep you from having to pay a large chunk of the costs out of pocket.
You also may be surprised to find that something you assumed qualified as an HSA-covered medical expense isn't necessarily covered. Maybe you had heard that counseling was a qualified expense, but when you take a closer look it could turn out that the sort of counseling you're looking for (say, marriage counseling) isn't necessarily a qualified expense.
Though there are ways an HSA is more convenient than other sorts of savings accounts, it can still have a lot of tricky waters to navigate like that. Ultimately there is a lot advantageous and risky alike about an HSA; you need to do the research to determine if one is right for your specific needs.
How Much Should I Put in My HSA?
If you can afford to put in the maximum amount into your HSA without breaking the bank, it's recommended you do that to ensure something of a security blanket for your medical expenses.
In 2019, the maximum contribution for an individual in their HSA is $3,500. For a family, it is $7,000. If you are 55 or older, you are eligible to add in a "catch-up" contribution of $1,000, regardless of individual or family.
Of course, not everyone has thousands of dollars right now to store away for a medical emergency. Don't put in more than you can afford to - remember, if you have to take some out and you're under 65, that withdrawal is subject to a penalty. Look very hard at what it seems like your medical expenses could be this year or down the line, and work accordingly from there.