As its name implies, a health savings account (HSA) is an account where money can be saved to pay for medical expenses. This type of savings account is best known for the tax advantages it offers. This is because deposits or “contributions” made to an HSA are not subject to income tax. Instead, accountholders are allowed to build up their savings tax-free and then “distribute” or use those funds to pay for medical-related costs when needed.
Medical expenses may include copayments, hospital labs, medications, dentist visits, or even health-related products at the grocery store (just to name a few). Accountholders can get information about what counts as a medical expense from both their HSA providers and the Internal Revenue Service (IRS). Any distributions for non-medical expenses are subject to tax.
Who Can Get an HSA?
HSAs are available to those with eligible high-deductible health plans (HDHPs). A health insurance plan is considered an HDHP if its deductible is over a certain dollar amount. This amount is determined by the IRS and may change from year to year. The IRS currently (in 2022) characterizes HDHPs as plans with annual deductibles of at least $1,400 for self-coverage and $2,800 for families.
How Does an HSA Work?
The IRS decides how much can be deposited tax-free into HSAs annually. The dollar amount of this contribution limit can change from one year to the next. For example, the annual contribution limit to an HSA was $3,600 in 2021 but was raised to $3,650 for 2022 (both of these figures refer to self-coverage only). Contributions that exceed the yearly limit are subject to tax.
HSAs have more than just tax benefits. They're also free from "use it or lose it" stipulations, meaning accountholders aren't required to use the funds in their HSAs within a certain time frame. This is in contrast to some other plans where funds must be forfeited if they're not used by the end of the year. Instead, the balance in an HSA is allowed to carry over from year to year. Additionally, while the IRS sets annual contribution limits, there's no limit to the total amount that can be in an HSA. For example:
Say you open an HSA. In the first year, you contribute a total of $1,500 without distributing any of it for medical expenses. Once the new year begins, that balance of $1,500 will remain in the HSA and still be available for you to use during the upcoming year if needed. Now, let's say the contribution limit for the new year is $3,600. This means you’ll be allowed to deposit up to an additional $3,600 to the HSA without the preexisting balance ($1,500) counting toward the contribution limit. This pattern continues year after year, giving the balance in your HSA the potential to keep growing over time.
Another benefit of HSAs is that they can earn tax-free interest. What's more, the funds in the account can be invested into various securities as well. While this provides an opportunity for further tax-free growth, keep in mind that investments carry risk. Additionally, some HSA providers may require that a minimum balance be in the account before funds can be invested.
Paying for Expenses
Many HSAs come with a debit card connected directly to the account. This makes paying for medical expenditures quick and easy. Alternatively, accountholders are often given the option to request reimbursement for medical expenses after the fact. This method requires accountholders to hold onto their receipts, invoices, or other documentation so they can request reimbursement later.
Where Can I Open an HSA?
HSA providers can include financial institutions,* insurance companies, or brokers. If your employer offers health benefits, you can see if they sponsor any HSA-compatible HDHPs. If so, you’ll also want to find out if they sponsor any HSAs or if you’ll have to find an external HSA provider on your own. In some cases, employers may even offer to match a percentage of your HSA contributions.
Should I Open an HSA?
This depends on not only your financial situation but also your health. Remember that an HSA must be accompanied by an HDHP. This means that, although you’ll have a higher deductible than a “traditional” insurance plan, your monthly premiums may generally be lower. Low premiums can make an HDHP an attractive option depending on your budget. However, keep in mind that you never know when you’ll need medical care; and if you have an HDHP when your hospital bill comes through, you’ll have to pay more out-of-pocket before your insurance kicks in.
Before opting for an HDHP, you’ll need to ask yourself some questions. These might include: Is my overall health good for my age? Do I foresee any upcoming medical expenses aside from regular, preventative care? Do any elements of my life put me at greater risk for injury or illness (hobbies, sports, work, family health history, etc.)? If a medical emergency arises, will I be able to afford out-of-pocket expenses if I have an HDHP? Can my monthly budget afford the monthly premiums of a traditional health plan? If I open an HSA, how much can I afford to contribute?
Aside from asking yourself the above questions, you can consult with an insurance specialist or learn more about HSAs and HDHPs from resources offered by insurance providers. You can also visit IRS.gov or HealthCare.gov for more information. Doing these things can help you determine whether these healthcare options are right for you.
The above article neither contains nor claims to contain all the information pertaining to health savings accounts (HSAs) or high-deductible health plans (HDHPs). To learn more about HSAs or HDHPs and whether they may be good options for you, consult an insurance specialist or refer to informational resources offered by insurance providers, the Internal Revenue Service (IRS), or other verifiable sources.
*Health savings accounts (HSAs) are not currently offered by Cyprus Federal Credit Union.