Purpose of this Article: to explain the basics of HSAs and the benefits of using them if offered by your employer

Overview:

HSAs were created in 2003 specifically to give individuals with high-deductible health plans a tax break. As an individual, you are eligible to enroll in an HSA if you meet the following four criterion:

1.  You enroll in a high-deductible health plan

   2.  You aren’t covered by a spouse’s health plan that isn’t high-deductible

   3.  You are not enrolled in Medicare

   4.  You cannot be claimed as a dependent on someone else’s tax return

Contribution Limits:

Similar to an IRA or 401(k) there is an annual contribution limits for both you and your employer. Each year the annual contribution limits may change but for 2017 the limits are as follows:

$3,400 for individual plans
$6,750 for family plans

And similar to an IRA, there is an additional $1,000 catch up contribution that can be made for people 55 or older.

HSAs matter more because high-deductible healthcare plans are on the rise…

As healthcare and insurance costs continue to rise, more companies are looking for ways to cut their costs.
Consequently more employers are switching their sponsored healthcare plans to high-deductible plans. This move ultimately shifts more of the financial responsibility for paying for health care away from the companies to the individuals.

Put more simply, a higher deductible plan means that you as the individual are responsible for a larger amount of your health care cost. This means that your monthly contribution from your paycheck is less, but you have higher out of pocket maximum contributions when the time comes (i.e. Higher deductible).

In 2017, the annual out-of-pocket payments for individual and family plans are $1,300 and $2,600 respectively as defined by the IRS. For more info see here.

It is expected that over the next 5 to 10 years, more people will find themselves facing higher-deductible health plans, as more employers switch their base healthcare plans to higher deductible plans. This means it is very likely that you will be facing HSAs as an option in your employer benefits package.

Triple-Tax Advantage of HSAs:

HSAs are a way for people with high-deductible health plans to set money aside for medical expenses. These savings accounts are considered “tax-advantaged” because the money you set aside is “before tax” and thus free of federal taxes. Money saved within an HSA is allowed to grow free of federal tax, and can also be invested free of tax consequences. And finally, when money is withdrawn specifically to pay qualified medical expenses, there is no tax penalty either. On an aside, see here for a complete list of qualified medical expenses

So in practice, an HSA offers its owner three specific tax benefits:
1.    Money can be set aside before taxes thus reducing your taxable base
2.   Money can grow tax free
3.   Money used from the account for qualified medical expenses are tax free

HSAs are better than Healthcare Flexible Spending Accounts (FSAs):

While both HSAs and FSAs allow you to set aside pre-tax money today future health care expenses, there are some key differences that make HSAs slightly better:

1.    You cannot take an FSA with you to your new job if you change. Your unused funds are forfeited. This is not the case with HSAs as the money saved goes with you into future jobs.

2.    If you do not use the total amount contributed to an FSA during the calendar year, you will lose it. Your unused funds are forfeited. This is not the case with HSAs as the money saved can be spent in future years.

3.    Anyone can open an FSA as there are no special eligibility requirements. This is not the case with HSAs as you must be in a high-deductible health plan to qualify for this type of account.

4.    If you die with money still in your HSA account, you can leave it to your spouse (who can use the money free of estate taxes, and tax-free for non-medical expenses) or other heirs (who would pay taxes on the money they inherit). This is not the case with FSAs.

5.    You can use funds from an HSA account to pay for prior period medical expenses (i.e. Expenses that occurred in 2016).

6.    Technically once you reach the age of 65 or older, you can take HSA money and use it for non-medical expenses without incurring a 20% penalty. This “loophole” only exists for HSAs

 

My hope in writing this article is that after reading this, you can now see the benefits of an HSA. Chances are, you’ll be experiencing one really soon.