I am a big fan of the Health Savings Account, or HSA. As individual and group premiums rise, employers are pushing their employees to take more responsibility for their health and healthcare costs, and offering HSA plans is one way they are doing this. You can have an HSA plan as an individual or in a group plan.
What is an HSA?
There are two components to understand. There is the HSA plan, and there is the HSA account.
The HSA plan is defined by the IRS and is crafted specifically to comply with IRS rules. Basically, they are high deductible plans and they are not allowed to offer any co-pay benefits – like paying $10 for a generic prescription or $35 for a doctor visit. Thus, they usually work well for healthy people… although more and more, they work even if you know you’re going to hit your out of pocket maximum for the year because of their lower premiums. You have to have an HSA plan in place in order to contribute to an HSA account. However, if you have an HSA plan you are not required to have an HSA account or to contribute – it’s completely optional. Although if you don’t you are wasting a fabulous tax deduction!
An HSA account is typically opened at a bank or credit union that offers HSAs – not every bank does. If you have an HSA plan, you are allowed to make pre-tax contributions to an HSA account. The maximum contribution will be $6900 in 2018 for a family and $3450 for an individual. If you are 55 or older, you can add another $1000 to those figures. If you get your insurance through your employer, you may find that your employer offers the HSA account for you and even makes a contribution to it during the year. In which case, you’d count this money as part of your contribution limit.
Benefits of Having a Health Savings Account
Ok, So What’s So Great About the HSA?
You might be thinking, what’s so great about this if my insurance essentially covers nothing unless I hit my deductible and/or out of pocket maximum? (They are often, but not always, the same amount.)
The HSA is a wonderful planning tool for several reasons:
First, they operate most like insurance is supposed to operate: a smaller cost for an unlikely (but potentially catastrophic) event… think fire insurance on your home. Going to the doctor or filling a prescription is not unlikely events at all, so really, when a plan offers copays for things like doctor appointments and prescription medication, that’s not really insurance, that is a discount plan. But you are paying for the discount in the premium!
Second, HSAs offer a triple tax break: the money is contributed with pre-tax dollars, the account grows tax-free… and best of all… none of it is taxed coming out! (as long as you use it for qualified medical expenses.) Yes, there are rules about what is a qualified medical expense but in a nutshell, most legitimate expenses for healthcare are okay. You can’t use it for the actual premium cost of the insurance, supplements, massage, or elective surgery (this is usually the case but there are exceptions). The HSA is the only vehicle where the money isn’t taxed going in or coming out if you follow the fairly simple rules!
Third, HSA dollars can be used on things that typically insurance doesn’t cover, such as alternative care with a chiropractor or acupuncturist for example. You can also use HSA money to pay for things like the dentist or eye doctor.
(See IRS Pub. 502 for a list of qualified medical expenses.)
Some people who are getting closer to thinking about retiring someday really use the HSA to their advantage. They use the HSA as another savings vehicle. They max out their contribution each year, but instead of spending the money on medical costs, they pay for their costs with regular old post-tax dollars. They still get the tax deduction, because the deduction is based on the contribution, not on the spending. Then in retirement, they’ve got an account they can use for health care costs.
How to Get the Most Out of Your HSA
If you have a large expense pre-retirement and you pay for it with post-tax dollars (i.e you just write a check), you can reimburse yourself for the cost years later. That means you can make a tax free withdrawal in retirement for a pre-retirement health care expense. This could make sense for a large ticket item, like a hospital bill. Having a tax-free account such as an HSA could really help you be strategic with retirement income. (Consult with your CPA, and save those receipts for this strategy!)
Get Help with Your HSA Plan
The HSA plan isn’t for everyone, but to figure out if it makes sense for you, it’s best to speak with someone who can analyze your individual situation and advise you. Brokers’ services are free to you, as they are compensated by the insurance carrier you choose. You can also contact us for help with deciding if an HSA makes sense for you.