What is a Health Savings Account (HSA) and What are the Benefits?

The landscape of healthcare and healthcare costs are dramatically changing. Many companies are now offering high coverage plans and many are pushing high deductible plans to its employees to help keep costs down and put the “cost ownership” in the individual’s hands. Therefore, Health Savings Accounts or HSA, are becoming very popular. However, many people do not know exactly what they are and what kind of benefits come with Health Savings Accounts. Below is a high-level summary, and please feel free to post any follow up questions in the comment section below.

A Health Savings Account is a type of savings account that lets the individual contribute money on a pre-tax basis to pay for qualified medical expenses. The money is taken out of your paycheck on a pre-tax basis and is put into a separate account that can only be used for qualified medical expenses. This money can be used to pay for deductibles, copayments, coinsurance, and many other medical expenses. Other qualified medical expenses include dental services, vision care, prescription drugs, and psychiatric treatments. Insurance premiums usually don’t count towards qualified medical expenses unless the premiums are for Medicare or other health care coverage if 65 years or more, health care insurance while unemployed and receiving unemployment compensation, and long-term care insurance.

Most HSAs give you a debit card and you can pay for these medical expenses just like you would with a credit or bank debit card. Since you are paying with pre-tax dollars, this should help lower your overall health care costs.

An HSA can only be used if you have what it called a High Deductible Health Plan (HDHP), which is essentially a healthcare plan with a high deductible. Most of the coverage does not kick in until you have met your deductible. HDHP with a deductible of at least $1,350 for an individual and $2,700 for a family makes it a Health Savings Account eligible. For 2018, you can contribute up to $3,450 for individual only HDHP coverage and up to $6,900 for family HDHP coverage.

Another great advantage is HSA funds roll over year to year so if you don’t spend them in a certain year, they roll over to the next year. This is a great feature because you never lose out on that money. The Health Savings Account is very often compared with the Flexible Savings Account (FSA). They both can be used for medical expenses, but there are some key differences. Unused funds in the FSA during a given tax year are forfeited once the year ends and are not rolled over into the next year. Also, while the elected contribution amount for the year can be changed by an employee with an HSA anytime during the year, the elected contribution amount for an FSA is fixed, and can only be changed at the beginning of the following tax year.

Also the money in HSAs can be invested in stocks, bonds, and other investments, once the HSA has a minimum balance. The amount earned is tax free, similar to an IRA, as long as you spend the funds on a qualified medical expense.