What Is An HSA And Why Should You Have One?

What Is A Health Savings Account?

A Health Savings Account (HSA) is a savings program where the money put into the account is not taxable and the funds can only be used for qualified health expenses. An HSA works hand in hand with a High Deductible Health Plan.

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What is a High Deductible Health Plan?

As it implies, HDHP’s are medical insurance plans with a high deductible. For instance, our family HDHP annual deductible is $5,000. That means we spend $5,000 of our money before health insurance pays anything. We still get the benefit of negotiated costs from the insurance company. The deductible is definitely high, but the monthly insurance premiums are reasonable. The total out-of-pocket for our plan is also reasonable. So we pay less each month, pay for everything until our deductible is met, then pay 10% until and if we reach the out-of-pocket. After out-of-pocket, we pay nothing.

The out-of-pocket is where some people struggle. That is why HDHP and HSA work together. Our HSA helps us pay our out-of-pocket.

My employer helps by giving a tax-free contribution to our HSA account at the beginning of the year. This starts us out with some funds for any expenses that may occur early in the year. Although this employer contribution is not required by law many employers offer this as an incentive to participate in HDHP’s.

What Is An HSA And Why Should You Have One? Share on X

Key Benefits of HSA’s

High Deductible Health Plans usually have lower monthly lower premiums. The money saved can be put into your HSA.
Money put into your HSA is not taxed. Your adjusted gross income on your taxes will decrease by the amount you deposit.
You earn tax-free interest on HSA balances.
The funds in your HSA belong to you and stay with you even if you change jobs.
It gives you a medical emergency fund.
Unspent money in an HSA account rolls over from one year to the next.
They are a smart way to save for current and future medical expenses.
Withdraws for eligible expenses are not taxable.

Rules and Regulations

The IRS regulates HSA’s, determining how much money can be put into the account each year. They also determine eligible expenses such as healthcare services, medications, or equipment. Each year the maximum contribution may change. For 2020 a family can contribute up to $7,100. At age 55 you can add an additional $1,000.

An HSA can be used in retirement for out-of-pocket expenses. For many reasons it is a good idea to contribute as much as you can and start as early as you can. Remember, the money rolls over year to year and if you change employers the funds stay with you.

If you withdraw funds for non-qualified medical expenses, you will have to pay tax on the withdrawal plus a 20% penalty.

After the age of 65, you can withdraw money from your HSA for non-medical expenses without incurring a 20% penalty. You will still have to pay taxes on the withdrawal, as this withdrawal would be treated similarly to a withdrawal from an IRA. But you also have the option of withdrawing funds for qualified medical expenses and pay no taxes at all, regardless of your age.

It is a good idea to keep receipts for expenses paid for with HSA funds. If you are audited by the IRS you may have to use them to explain the use of the funds.

You qualify for an HSA if you are covered by an HSA-qualified health plan and have no other health coverage, such as other health plans, Medicare, military health benefits, or medical FSAs. Also, you cannot be claimed as a dependent on another person’s tax return.

Some Qualified Expenses

Copays/deductibles
Prescriptions
Dentist: cleanings, orthodontia, dentures
Exams: physicals, dermatologist
Vision care: exams, new glasses, LASIK
Medical equipment: blood pressure monitor, thermometers
Chiropractor or acupuncturist
Hearing exams and aids
Smoking cessation programs

However, you cannot use funds from your HSA to pay for your health insurance premium — unless you’re unemployed.

Medical expenses. Health Savings Account.

There are a lot of regulations with an HSA but it is a really good way to save up for unforeseen medical expenses for you and your family. Take advantage of the tax-free benefits that HSA has to offer and invest using your HSA money.

Check the IRS site for any questions you may have.