Health insurance is important; there’s no doubt about that. However, choosing a health insurance plan can be completely overwhelming when the company you work for offers you an array of options to choose from. How do you know what’s right for you? Well, more and more companies seem to be pushing their employees to elect high deductible health plans (HDHP). Health savings accounts (HSA) go hand-in-hand with these HDHPs. But what exactly are HDHPs and HSAs and how do they work? I have summarized some helpful information below for those who want to learn more about HSAs, including the potential pros and cons of enrolling in a qualified high deductible health plan.
Am I Eligible for a Health Savings Account?
In order to be eligible for a health savings account there are a few requirements that you must meet. First, you must be enrolled in a qualified HDHP. If you are self-employed or if your employer doesn’t offer an HSA you may still be able to open an HSA on your own if you are enrolled in a HDHP. HDHPs have their own requirements that must be met to be a qualified plan. For example, in 2018 HDHPs require a minimum annual deductible of $1,350 or more for individuals and $2,700 for families. Further, they set an out-of-pocket max of $6,650 per year for individuals and $13,000 for families before the insurance company will cover 100% of the allowable medical expenses. While HDHPs have higher deductibles, by nature, their monthly premiums are often much lower than standard insurance plans, which makes them appealing to individuals trying to reduce their upfront out-of-pocket costs.
Another requirement that must be met, in addition to being enrolled in a qualified HDHP, is that that individual can not be enrolled in Medicare. Once you enroll in Medicare, you are not longer able to contribute to an HSA; however, the funds you invested before enrolling are still available for your use even after your Medicare coverage starts. Additionally, you cannot be claimed as a dependent on someone else’s tax return if you want to open an HSA. If you check all the boxes and meet the requirements then you are eligible!
Why Would I Want to Open a Health Savings Account?
There are a number of benefits to opening a health savings account, the main one being tax advantages. The money an individual contributes to an HSA is tax-deductible or can be pre-tax if you prefer. Once in your account, the money grows tax-free (yes, that means interest and gains are all free of tax). Even better, the withdrawals for qualified medical expenses are also tax-free. Basically, everything about HSA are tax-free if you use them appropriately and for qualified medical expenses.
In addition to the tax advantages, the money in HSAs roll over each year. Simply put, if you don’t use all of the money in your HSA for qualified medical expenses in one year that balance rolls over the next year and continues to roll over until it’s used. Like other savings accounts, that balance that rolls over can earn interest and begin to compound, so the balance will continue to grow in perpetuity. We’re not down with the advantages, there are more.
Another advantage which many people don’t consider is that HSA accounts move with you; they are not tied to a specific insurance plan or even employer. That means if you change insurance plans, change jobs or retire, the funds in your HSA will go with you and continue to grow tax-free.
An additional benefit of HSAs is that other people can contribute to your account. This includes your employer, your spouse, a parent, a grandparent or anyone else who likes you enough to contribute on your behalf! One thing to keep in mind, though, there are annual limits on contributions. See the chart below for the 2018 and 2019 contribution limits.
Disadvantages to a Health Savings Account
There are also some disadvantages to a health savings account, such as the high deductible requirement. While you are paying less on a monthly basis with the HDHP, it may be difficult for some people to come up with the large amounts of cash needed for a HDHP if a medical event occurs. Another disadvantage is that some people may feel pressured to save (keep money in the HSA) and, by doing so, skip scheduling doctor appointments and visits when they really should go.
Using an HSA requires organization as you must retain your qualified medical expense receipts to prove that the withdrawals you were making from your HSA account were for an appropriate expense. Click here for medical expenses that the IRS deems qualified. If you don’t have receipts and or you make withdrawals for non-qualified expenses before you turn 65, you will owe taxes on the money plus an additional penalty of up to 20%. After age 65, you can withdraw the money without the money for nonqualified medical expenses, but you will still owe taxes on that withdrawal.
Some HSAs also have fees associated with them. This could include a monthly maintenance fee or a per-transaction fee which often varies based on the institution the HSA is held at.
So, Is A Health Savings Account Right for You?
A health savings account has both pros and cons and they may not be for everyone. They’re great for people who wish to limit their upfront healthcare costs while savings for expenses that will likely occur at some point in the future. Since HSAs are directly linked to HDHPs, the monthly premiums are generally significant less than if you have a low deducible health plan. Knowing the pros and cons of HDHPs and HSAs can help you make an informed decision when choosing your health insurance plan. A high deductible health plan and health savings account is especially great for someone who is in great health and typically only goes to the doctor for an annual physical and the like.
Do you have a health savings account? If so, what do you like about them? If not, would you consider one after reading the pros and cons listed above? Feel free to comment with any additional questions you may have.