Your Complete Guide to Health Savings Accounts (HSAs)
Every year, millions of Americans sign up for a Health Savings Accounts (HSA) to pay for their out-of-pocket medical fees. But you may not know that HSAs don't only cover expenses. They can also serve as an excellent investment tool. In this Guide to HSAs, we’ll show you the benefits of having an HSA and share important information to help you save money.
What Is a Health Savings Account (HSA)?
HSAs are tax-advantaged savings accounts that cover out-of-pocket medical expenses. The federal government has offered them since 2004. You can open one any time. According to HealthCare.gov, an HSA allows you to set aside money on a pre-tax basis for qualified medical expenses. It lowers health care costs when you use untaxed dollars in their HSA to pay off co-payments, deductibles, coinsurance and other fees. Unfortunately, you can't use HSA funds to cover premiums.
Unlike other types of health expense accounts, you own the HSA. Additionally, you won’t lose the money you contribute into your account at the end of the year. You can rollover remaining funds and use them for qualified healthcare expenses. When you buy health insurance, an HSA earns you savings. Unfortunately, even when people are qualified to open an HSA, most do not. The Employee Benefit Research Institute, a public policy group, conducted a study on workplace benefits programs. Their researchers found that 21.4 million – 33.7 million people had signed up for HSA-eligible health insurance plans in 2017. Although many of these individuals were eligible for HSAs, only 22.2 million qualified applicants opened one.
The study also found that people who owned HSAs had an average balance of $2,922 in 2016. In 2020, the federal government increased the maximum contributions that people can save in their HSAs. Researchers say few people contribute the maximum to these accounts. Most withdrew money to pay for current medical expenses. And only 5 percent of individuals used HSAs as investment accounts.
Can I Open My Own Health Savings Account (HSA)?
Yes, you can, even if your employer doesn't offer an HSA. You can make current-contributions only when you have HSA-qualified HDHP. Additionally, you can’t have other disqualifying coverage such as Medicare, Medicaid, TRICARE, or a spouse's health plan. Additionally, you can’t qualify as someone’s dependent.
If you receive your HDHP through your employer, the company may ask you to sign up with their HSA provider. These plans differ from typical HSAs offered to individuals. Employers work with insurance providers to negotiate lower fees and offer more investment options.
You don’t have to select the HSA offered by your employer, as long as you are in a qualified high deductible health plan. If you’re going to consider the HSA as a retirement account, remember your fees and investment options will matter. When following this route, consider your company’s HSA first. Your employer will typically offer matching contributions to the account.
Buying an HSA can be difficult on your own because many providers won’t offer information about their interest rates online. You can comparison-shop for one with SmartFinancial’s insurance platform.
Two Types of Health Savings Accounts
Another consideration that shoppers should make when searching for an HSA is how they will use their account. You can use an HSA either to pay your healthcare expenses or fund your retirement. Are you’re using your HSA account for qualified medical expenses? Forbes Magazine contributor Tom Anderson recommends signing up for HSAs with checking accounts. They should limit extra charges and maintenance fees. These accounts should also offer FDIC insurance and good interest rates on deposits. Do you plan to use your HSA as an investment vehicle? You can also invest money from your HSA into mutual funds, stocks and other investment tools. If you plan to do this, you can get assistance from an HSA custodian, who will provide you with a list of low-fee investment options. Consult with a fee-only financial advisor before investing.
Your HSA should charge low fees for both actively managed and index funds. Anderson says they should offer several options in the core asset classes and allow first-dollar investing. Most HSA providers require account holders to keep $1,000 to $2,000 in a checking account before they can invest. This requirement can drag down returns.
The average cost for index funds ranges from 0.30 percent to 0.75 percent annually. The average for active funds varies from 0.80 percent to 1.20 percent. Fees will eventually drop, and investment options will improve as the HSA market grows.
HSA Contribution and Withdrawal Limits
HSAs have annual contribution limits which are set by the IRS. The maximum contributions for individuals are $3,550 and $7,100 for families. The federal government has set the annual catch-up contribution rate for people ages 55 years or older at $1,000. The HSA differs from flexible spending accounts (FSAs), which are more common. FSAs don’t allow account holders to roll over their money for their expenses. HSAs do. Additionally, they don't require users to spend all their money or lose it forever. Instead, people can rollover this money as much as they want, year after year. According to Forbes Magazine, this makes the HSA a powerful investment vehicle.
Qualifying for Health Savings Accounts
Health Savings Accounts provide enormous benefits to users. You can only open an HSA if you meet the eligibility requirements. Only people enrolled in High-Deductible Health Plans (HDHPs) can open an HSA. Here are seven more standards that individuals must meet:1. You have a qualifying high-deductible healthcare plan that meets the minimum deductible and annual maximum out-of-pocket threshold.
2. You don’t have additional medical coverage, such as a spouse’s insurance plan.
3. You don’t receive Medicare coverage or benefits.
4. You aren’t a TRICARE or TRICARE for Life member.
5. Someone can’t claim you as a dependent on their tax return.
6. You don’t have healthcare benefits from the Veterans Administration.
7. You don’t have disqualifying alternative medical savings services, such as a Flexible Spending Account or Health Reimbursement Account.
What Are High-Deductible Health Plans?
You can only open an HSA when you’re enrolled in a High-Deductible Health Plan. This insurance coverage requires members to pay more expenses than other marketplace plans. Members also have higher deductibles. These are costs the policyholder must spend before their insurance kicks in. In exchange for this higher deductible, your premium rates will be lower. Although policyholders pay more medical fees, they often have cheaper premium rates. In the next section, we’ll discuss the minimum HDHP deductible these plans have.
When you shop for plans within the Marketplace, it will indicate if plans are HSA-eligible with a flag in the upper-right corner.
Shoppers can also use the Marketplace’s HSA-eligible plans by selecting the “filter” option in the right-hand corner of the site. They can choose the “Health Savings Account (HSA) Eligible Plans” filter. During 2021, the minimum deductible HDHP members will pay before health insurance starts paying:
Individual HDHP: $1,400
Family HDHP: $2,800
Maximum out-of-pocket costs you’ll pay if you need more health care items and services
Individual HDHP: $7,000
Family HDHP: $14,000
Some HDHP deductibles are higher than the minimum ones and may be as high as the maximum out-of-pocket costs shown above.
What Expenses Does an HSA Cover?
HSAs cover many expenses that High-Deductible Health Plans may not cover. Members can use these accounts to pay for the following healthcare costs:
- Qualified out-of-pocket medical expenses that your HDHP doesn’t cover.
- Medical, dental, or vision coinsurance payments
- Prescription drugs
- Prescription eyeglasses and optical supplies (eyeglasses, contact, goggles, sports and safety glasses, sunglasses) Medical treatments that your insurance plan may not cover, such as visits to chiropractors
These medical expense accounts vary depending on the provider. Some insurance companies may require you to pay additional fees to use the debit card associated with the card. Others may require maintenance fees for investments associated with an HSA.
3 Tax Advantages of Health Saving Accounts
Health Savings Accounts have three tax advantages. Your employer can make pre-tax contributions to your HSA. When you open this account on your own, it’s tax-deductible. Additionally, you don’t pay any taxes on the account’s growth. The federal government won’t charge taxes if you make withdrawals for eligible healthcare expenses.
Since HSA contributions won’t count toward your tax burden, the IRS will charge you as if you earned less money during the year. For instance, if you made $70,000, and you put $2,000 into your HSA, you’d be taxed at the $68,000 rate.
6 Things to Remember When Using HSAs and HDHPs
The U.S. federal government urges people to consider several facts about Health Saving Accounts and High Deductible Plans.
Tip One: Your HDHP can have lower monthly premiums than non-high-deductible plans. You should consider the fees you pay out-of-pocket before the HDHP pays for expenses. These health insurance plans have higher-than-standard deductibles.
Tip Two: You can deduct the amount you deposit in an HSA from the income you pay federal taxes on. If you still have money in your HSA when you turn 65 years old, you can spend it on anything you choose. Unfortunately, if you aren’t spending this money on qualified medical expenses, the government will tax it as income at the current rate.
Tip Three: People can use HSA funds to pay for deductibles, copayments, and other qualified medical expenses. You can withdraw money to pay for eligible medical expenses, tax-free.
Tip Four: Unspent HSA funds roll over from year to year. It allows you to build tax-free savings to pay for medical care later in your life. HSAs may earn interest, which isn’t subject to federal taxes.
Tip Five: HDHPs are available in most areas and may be available as qualified health plans at the Bronze, Silver, or Gold levels on HealthCare.gov. You can enroll in HDHPs directly through health insurance companies or employers. HDHP may not be available in your area. You’ll find out when you compare plans on HealthCare.gov or use SmartFinancial’s insurance platform.
Tip Six: An HDHP can provide certain preventative care benefits with or without a deductible that’s less than the annual minimum.
Additional Benefits of an HSA
You can make contributions to your HSA through payroll deductions. These funds are tax-free, even if you don’t itemize these expenses.
You can also add money to their accounts directly from your own funds. The government considers these contributions on a pre-tax basis. It will reduce your federal and state tax liability. They are also not subject to FICA taxes.
If your employer contributes any funds to your HSA, the federal government does not consider them as part of your taxable income. The money in your account balance will grow tax-free, so any capital gains, interest, and other dividends you receive are nontaxable. Additionally, account holders do not need to meet a specific age before they withdraw funds.
Can You Transfer Funds from Investment Retirement Accounts to HSAs?
An Individual Retirement Account (IRA) allows you to save money once you retire. You can open these tax-advantaged accounts through a financial institution.
Consumers can make a one-time tax-free trustee-to-trustee transfer of IRA funds into an HSA. The individual must stay enrolled in a high deductible health plan and be eligible for an HSA for a 13-month test period after the fund transfer. The funds transferred from the IRA apply to the annual HSA maximum contribution limit. You can make these contributions directly to the IRA trustee. Do you want to shop for a high-deductible health care plan that allows you to open a tax-advantaged HSA? You can use SmartFinancial’s insurance technology to shop for qualifying health plans. Fill out our quick form on this page, and we’ll provide you with a list of quotes from different insurance providers and local agents within your area. You can compare coverage with each plan. It’s quick, easy, and simple.
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