For many workers, having health insurance is a crucial consideration and a perk that they look for before accepting a job. Many businesses offer health savings accounts to meet this need, help with coverage, and lower the cost of health insurance (HSA). In this post, we define what is a health savings account, go over its operation, and respond to some frequently asked questions concerning HSAs.
What is a health savings account (HSA)?
A health savings account (HSA) is normal savings account that both the individual and their employer contribute to in order to cover certain medical expenses. HSAs are frequently only provided in conjunction with high-deductible insurance plans and give tax benefits. HSAs function like savings accounts for pre-approved medical expenses like medicines and doctor visits to aid with excessive costs. They frequently deal with dental and optical care as well.
How is an HSA put to use?
An HSA can only be used if you have a high-deductible health plan because it is designed to assist you to cover significant out-of-pocket expenses. You can enroll in an HSA on your own or via your employer, and frequently, the money will be transferred automatically into your savings account. You are allowed to deduct expenses for both current and future medical care each year. Tax deductions apply to these expenses.
Since the savings account works like a typical 401(k), you will be taxed on any withdrawals you make for non-health-related purchases. If you utilize your withdrawals for medical-related purchases, taxes are not due. The money in your health savings account rolls over to the following year if you do not spend it all in one year, saving you money in the long run. You might use the money you’ve saved, for instance, if you don’t deduct from your HSA for a year or two, but then you require urgent medical care, such as surgery.
What Are the HSA Eligibility Requirements?
For you to open a health savings account, you must fulfill certain requirements. Here are the eligibility requirements for HSAs:
- A high-deductible health plan is required (HDHP). Many plans specify whether they have a high deductible and are HSA-eligible.
- You lack other health insurance (with a few exceptions).
- You are not a Medicare beneficiary.
- You are not listed as a dependent on anyone’s tax return.
- You can start an HSA and make contributions as long as you meet these requirements.
Note on HDHPs: Monthly premiums for high-deductible health plans are often lower than those for equivalent preferred-provider organizations (PPOs). However, contrary to what the name might imply, you’ll have higher out-of-pocket costs (up to the deductible) before the HDHP begins to assist with costs. But if you work hard enough, you can use the monthly premium savings to fund your HSA.
Are there any drawbacks to having an HSA?
Although having a health savings account has numerous advantages, there may also be some disadvantages depending on your circumstances:
Lack of support for chronic health conditions: Since an HSA requires a high deductible healthcare plan, it might not be the best choice if you or anyone covered by your plan is prone to health problems. Instead, you might wish to look for a plan with higher premiums and smaller deductibles to support your continuous high spending.
- Transaction and maintenance fees: Depending on your needs and how frequently you visit the doctor, some HSAs charge either a transaction fee or a monthly maintenance fee.
- Could result in use or tax penalties: If you use the money for something other than medical expenses, you run the danger of paying taxes and penalties, just like when you take money out of your 401(k) too early.
- Keeps records necessary: Another drawback of a health savings account is the requirement for excellent record-keeping abilities. All receipts for purchases made with your HSA must be kept. This will support the claim that the withdrawals were used for legitimate, medically necessary purposes.
What to consider when choosing a provider for your HSA?
Health savings, Lively, The HSA Authority, and Fidelity are a few of the most respected HSA service providers. Which, however, is the best? Take into account the following key factors while comparing different providers:
- Comparing the investment possibilities offered by each platform is a good idea if you intend to invest the funds you deposit into an HSA. Westlin advises constantly basing your investments on your objectives. According to him, you should invest in a lower-risk portfolio if you plan to utilize your HSA as a savings account and take money from it to pay for medical expenses. On the other hand, you can afford to take on more risk if you plan to utilize your HSA as a retirement fund and keep money invested for a long time.
- Fees: There are costs associated, just like with any retirement account. Be sure to keep an eye out for monthly bank fees or investment fees while you are comparing different accounts.
- Debit card alternative: As previously indicated, be sure to take into account a cash-back or travel-points credit card to earn rewards on your purchase for your qualified medical expenses. However, find out whether the service provider will issue a debit card if you choose to use the money directly from your HSA.
- Account minimums: Before you may begin investing in some accounts, there must be a minimum balance. For instance, the HSA Authority mandates that you have $1,000 in cash on hand in your account before you can start trading and that $1,000 must always be available and uninvested. You can only invest $50 if you have $1,050 in your account.
One method to put tax-advantaged money for your future is through a health savings account. In fact, if you withdraw money only for qualified costs, the HSA is one of the very few options to totally avoid taxes on a portion of your money. You must open an account with a custodian and ensure that the money is maintained apart from the rest of your portfolio if you wish to invest a portion of your HSA. However, once you have a plan in place, you may use an HSA to maximize your healthcare expenses and benefit from triple tax savings to support your investing strategy.