Health Savings Accounts (HSAs)

Health Savings Account Basics

• What they are: Taxed-advantaged savings accounts used to pay for qualified healthcare expenses.
• Pros: Tax-deductible contributions; tax-free withdrawals; tax-free earnings; funds roll over; portable.
• Cons: High deductible requirements; penalty if used for non-qualified expenses; monthly maintenance or per-transaction fees may apply.
• How to invest: Through your insurer’s recommended bank, your company’s HR department, your local bank or credit union, or other financial institutions.
• Tip: Contribute enough to cover your deductible, plus a buffer for medical costs that are considered qualified, but that your insurer may not cover (such as acupuncture or chiropractic care). Note: If your insurer does not consider something a covered cost, any amount you pay will not go towards your deductible – thus the buffer. If you anticipate having a lot of out-of-pocket medical expenses in the future, try to max out your contribution each year. Any funds in the account are yours forever, whether you switch jobs, change health insurers or move. Be sure to keep all your receipts – you’ll need them if your HSA is ever audited.

Health savings accounts (HSAs) are like personal savings accounts, but the money can only be used to pay for qualified healthcare expenses incurred by you, your spouse and your dependents. The IRS decides what counts as a qualified expense (check out IRS Publication 502, Medical and Dental Expenses for details), but they generally include your costs for the diagnosis, cure, mitigation, treatment and prevention of disease, plus treatments for conditions that affect any part or function of the body. Expenses for cosmetic reasons or for things that benefit your general health (e.g., vacations) do not qualify.

HSA Eligibility

To be eligible for an HSA, you:

• Must be enrolled in a high-deductible health plan (HDHP), meaning your health insurance must have a deductible of at least (for 2017) $1,300 for an individual plan or at least $2,600 for a family plan.
• Can’t be covered by any other non-HDHP plan (except for limited coverage plans like dental and vision).
• Can’t be enrolled in Medicare.
• Can’t be claimed as a dependent on someone else’s tax return.

Contribution Limits

The IRS determines the combined amount that you, your employer and any other person can contribute to your HSA each year. For 2017, the maximum contribution amounts are $3,400 for individuals and $6,750 for family coverage. You can add up to $1,000 more as a “catch-up” contribution if you are age 55 or older at the end of your tax year. Contributions are reported on IRS Form 8889 and Form 1040. 

Aren’t HDHPs Scary?

Many people panic at the idea of a high deductible, but before you decide that they’re a bad thing, let’s take a closer look. If you have a HDHP, your monthly premiums will be less – and in some cases, much less – than if you have a low-deductible plan. This limits your upfront healthcare costs. As a basic example, you might pay $250 a month for a plan with a $7,000 deductible, or $600 a month to bring that deductible under $1,000. 

It’s also possible to find a high deductible plan that offers a 0% coinsurance, meaning that after your deductible is met, all your healthcare costs are completely paid for by the plan – as long as they are covered costs (you’ll have to read the fine print on your health insurance policy to find out which costs are covered, and which aren’t). For some people, that’s pretty reassuring.

Keep in mind, too, that under the Affordable Care Act (ACA), a long list of preventive services must be covered at 100% – meaning you don’t pay a thing for these services (as long as the service is provided by an in-network provider), whether you’ve met your deductible or not. Preventive services include things like colorectal cancer screening for adults, mammograms and HPV screening for women, depression screening for adolescents, and immunizations at any age. See HealthCare.gov for a complete list. This will likely remain in force through 2017; it's not clear what will happen to various provisions of the ACA going forward.

With these things in mind, a HDHP might not be that scary, at least for now – especially if you are generally healthy and don’t anticipate a lot of healthcare expenses.  Plus, if you do have a HDHP, you can use funds from an HSA to pay for your healthcare expenses, which effectively provides a discount (equal to your tax rate) on any expenses, since contributions to your HSA are tax-deductible. 

Two other things to consider: Many providers are willing to work with patients who have HDHPs to make healthcare costs more affordable. One thing they might offer is a discount for paying right away – which could be substantial – and you could still use funds from your HSA to pay. Also keep in mind: Depending on your income, you may qualify for financial assistance that would help you pay for your share of the costs. It pays to always ask: "Do you offer a discount if I pay right away," and "Do you offer any type of financial assistance?"