Benefits of Health Savings Accounts (HSAs)

As open enrollment season swings into action, many individuals and families are faced with important decisions about their healthcare plans. One option that deserves careful consideration is the Health Savings Account (HSA). HSAs offer a unique set of advantages that can help you save money, achieve financial security, and improve your overall well-being. In this article, we'll explore the benefits of having an HSA and why it might be the right choice for you.

What is an HSA?

Before diving into the benefits, let's clarify what an HSA is. A Health Savings Account is a tax-advantaged savings account designed to help you cover qualified medical expenses. To open an HSA, you need to be enrolled in a High Deductible Health Plan (HDHP), which often comes with lower monthly premiums but a higher deductible. The funds contributed to your HSA are tax-deductible, and they can be used for various medical expenses, today and in the future.

Many folks may have a Flexible Savings Account (FSA) which if offered can provide for tax savings on medical expenses for the year. And while FSA is a good choice, it does expire at the end of the year, so any funds contributed to it, but not used disappear at the year end. HSAs are different as they technically never expire. So, let's learn more about HSA as an option to covering your medical costs.

Before we proceed, let's address the elephant in the room: a fear of high deductible.

Fear of High Deductibles

We understand that one of the main concerns when considering an HSA is the high deductible that typically accompanies HDHPs. Many individuals worry that they might find themselves in a situation where they have to pay substantial out-of-pocket costs before their insurance coverage kicks in. It's a valid concern, and no one wants to face unexpected medical expenses they can't afford.

However, this is where the beauty of the HSA truly shines. While HDHPs may have higher deductibles, the HSA is designed to offset this very fear. When you contribute to your HSA, you're essentially setting money aside specifically for covering medical expenses. So, if you do encounter an unexpected medical bill or find yourself needing to cover a significant portion of your deductible, you can use your HSA funds. This ensures that you have a financial safety net to fall back on, reducing the anxiety associated with high deductibles.

Moreover, remember that your HSA funds don't disappear at the end of the year, unlike some other healthcare savings options. Any unused money in your HSA rolls over from year to year, allowing you to build a reserve over time. This means you can gradually accumulate the funds needed to meet your deductible, giving you greater peace of mind as you navigate your healthcare expenses.

In addition to providing financial security, your HSA contributions can also earn interest or be invested, further boosting your ability to cover the costs of a high deductible. Over time, your HSA can become a robust tool for managing and even thriving with a HDHP, ultimately making your healthcare expenses far more predictable and manageable. So, while the initial fear of high deductibles is valid, the HSA is a strategic and valuable solution to mitigate those concerns.

Affording Insurance and HSA

It's entirely understandable that individuals worry about affording both health insurance premiums and contributions to their Health Savings Account (HSA). Balancing these costs can seem daunting, especially when you're evaluating your monthly budget. However, it's essential to recognize that HSAs can be a tool that helps you manage your healthcare expenses without necessarily increasing your overall annual expenditure.

Consider this: when you choose a High Deductible Health Plan (HDHP) paired with an HSA, you're often rewarded with lower monthly insurance premiums compared to traditional health plans. This can free up some funds in your budget, which you can then use to fund your HSA. While it's true that the deductible you must meet before your insurance coverage kicks in may be higher, the HSA contributions can be used strategically to bridge that gap without breaking the bank.

Firstly, explore the amount you can comfortably contribute to your HSA. By making regular contributions to your HSA, which also lower your taxable income, you are building a medical fund that can offset your deductible and medical costs when needed. This way, you're effectively spreading the cost of healthcare over time. The annual cost of your HDHP premium plus your HSA contributions should ideally be compared to the total annual cost of a traditional health plan, which often includes higher premiums.

With HDHP, your cost for seeing a medical provider will typically be different from the copay structure you might be used to with regular health insurance. In an HDHP, you'll typically have to pay the full cost of medical services until you meet your deductible. After that, your insurance plan will start covering a portion of the costs. Here's how it generally works:

1. Meeting the Deductible: You are responsible for paying the full cost of medical services, including doctor's visits, prescription drugs, and diagnostic tests, until you've met your deductible. HDHPs often have higher deductibles compared to traditional plans, which is one of the trade-offs for their lower premiums.

2. Cost-Sharing: After you've met your deductible, your HDHP will usually cover a portion of your healthcare costs. This is often expressed as a coinsurance percentage (e.g., 80/20), where your insurance pays a certain percentage of the cost, and you pay the remaining percentage. The exact coinsurance terms can vary depending on your specific plan.

3. Out-of-Pocket Maximum: HDHPs typically have an out-of-pocket maximum, which is the most you'll have to pay for covered services in a plan year. Once you reach this limit, your insurance will usually cover all remaining covered expenses.

It's important to note that preventive care services, such as vaccinations and certain screenings, are often covered at 100% by HDHPs, even before you meet your deductible. This is a requirement under the Affordable Care Act.

Check the details of your specific HDHP by contacting your HR department. Your plan's summary of benefits should outline the deductible, coinsurance percentage, and out-of-pocket maximum. Understanding these details will help you gauge the cost of seeing a medical provider under your HDHP. Keep in mind that HSAs can help you save and budget for these expenses, making the transition to an HDHP more manageable. Additionally, your employer may offer a calculator to help you understand the costs and benefits of different plans offered and spending a few minutes figuring that out may be worth your time, especially if it means that you'll save money in the long run.

Benefits of HDHP and HSA

Now that we got some of the important piece out, let's look at some benefits of considering an HDHP and an HSA.

1. Triple Tax Advantages

One of the most significant advantages of an HSA is the triple tax benefit it offers:

• Tax Deductions: Contributions to your HSA are tax-deductible, meaning you can reduce your taxable income for the year.

• Tax-Free Growth: The money in your HSA can be invested, and any earnings from those investments are tax-free.

• Tax-Free Withdrawals: When you use your HSA funds for qualified medical expenses, the withdrawals are also tax-free.

This triple tax advantage makes HSAs an incredibly efficient way to save for healthcare expenses.

2. Employer Contributions

Many employers recognize the benefits of HSAs and offer contributions to their employees' accounts. This is essentially free money (it does not count as income to you) that can help you cover healthcare costs. Depending on your employer's policy, they may match a portion of your contributions, or they may make a fixed annual contribution to your HSA. Be sure to inquire about this during open enrollment to take full advantage of employer contributions.

3. Investment Opportunities

Similar to retirement plans like 401(k)s and IRAs, HSAs allow you to invest your funds. This means that your contributions can grow over time, potentially generating substantial savings for future healthcare expenses. Investing your HSA funds can help you stay ahead of rising medical costs and secure your financial health in the long term.

However, when considering whether to invest the funds in your HSA, consider the time horizon on when you'll need the money. Because your money is invested in the market and markets can be volatile, it is not uncommon to experience losses, especially short term. History tells us that over the long term the markets typically appreciate, however no one can promise what the markets will do, so make sure you assess your comfort, time horizon and risk tolerance before investing and understand that markets DO NOT always and continually go up.

4. Control and Flexibility

HSAs offer unparalleled control and flexibility. You have the power to decide how much to contribute to your HSA each year, up to the annual limit set by the IRS. For 2024, the maximum contribution is as follows:

• $4,150 for individuals (self-coverage)

• $8,300 for family

• additional $1,000 catch up contribution for those 55 and older

If your employer is making contribution to your HSA, that amount is included in the maximum allowed. So, if your employer contributes $1,000 your maximum contribution will be $3,150 for the year. Also please note that you do not have to contribute the maximum allowed. Any amount is typically acceptable, as long as it's no more than maximum. Finally, the maximum amount typically adjusts annually, so it's important to take a look at your plan and contribution every year during the open enrollment period.

You also have a flexibility on when and how you can spend the funds. For example, let's assume that you contribute maximum for 2024 and only spend $1,000 out of it. The remaining $3,150 is still yours and you can spend it next year, if you need to, or save it for when you are 80. The choice is yours and flexibility allows you to save for future healthcare expenses according to your unique needs and financial situation.

5. Portability

Your HSA is not tied to your employer; it belongs to you. This means you can take it with you if you change jobs or retire. Portability ensures that your healthcare savings remain accessible throughout your life. Yes, even the employer contribution, should they offer it.

HSA vs. FSA: Understanding the Difference

Folks often confuse FSA with HSA, so we thought it would be important to note the difference between the two:

• HSA: HSAs allow you to roll over any unused funds from year to year. They are portable and can be invested. Contributions are tax-deductible and if invested, grow tax-free. Withdrawals for medical expenses are also tax free.

• FSA: Flexible Spending Accounts (FSAs), on the other hand, are "use it or lose it" accounts. Any money not spent during the plan year is typically forfeited, so careful planning is important. They are not portable, so if you leave your employer, you cannot take these funds with you. Good news is that your contribution to FSA is pre-tax and lowers your taxable income and as such payments for medical expenses are using pre-tax dollars, which is nice.

Having a fund that can lower your taxable income today for expenses that you know you will have is typically a good idea. Just note the differences between the two and ask your employer, what if any, options they provide. Keep in mind that the only way to have an HSA is with an HDHP.

Downside of HSA

Like everything else, HSA is not all roses, butterflies and unicorns and it may not be the best option for all individuals. It does come with some downsides as well, that we find important to highlight to help you better evaluate whether this is for you.

1. HDHP requirement: It should come as no surprise to you that the only way to unlock the HSA treasure chest is to have a high deductible health plan. If you have high medical needs and don't have much saved up for your health care costs, this could potentially be financial detrimental to you and might not make a whole lot of financial sense.

2. No other health coverage: You cannot sign up for your own HDHP and then also have medical coverage from your spouses plan. Your HDHP must be your only health plan. You can, however have dental, vision, disability or long-term care plans.

3. Not enrolled in Medicare: Since Medicare is a health plan, it should go without saying, but for clarity purposes we're saying it anyway.

4. Not claimed as dependent: You cannot be claimed as a depended on someone else's tax return.

5. Non-medical expenses taxes and penalties: If you withdraw your funds for non-medical expenses you will be taxed at your ordinary income rate. Additionally, if you withdraw that money for non-medical funds and you are under the age of 65, you will also have to pay some hefty penalties of 20%.

So, there you have it. These are a few downsides to having an HSA and for some they might be significant. We highly encourage you to take the pros and cons, work with your financial planner or tax adviser to understand whether this is a good option for you and your financial situation.

Qualified vs Non-Qualified Medical Expenses for HSA

When it comes to Health Savings Accounts (HSAs), it's essential to understand what expenses can be paid for with your HSA funds. Qualified medical expenses include a wide range of services and items directly related to your health.

It's important to note that not all medical expenses are HSA-eligible, and there are strict guidelines in place. HSA regulations can change over time, and there may be exceptions and specific circumstances that could impact the eligibility of certain expenses. For a full list of qualified medical expenses, it's recommended to consult the IRS guidelines or your HSA provider. Keeping accurate records and receipts for your expenses is also crucial to ensure compliance and smooth HSA management.

What Qualifies as a Medical Expense for Your HSA?

1. Doctor's Visits: Your HSA can cover costs associated with medical consultations, examinations, and treatments.

2. Prescription Medications: Prescription drugs prescribed by a healthcare professional are typically HSA-eligible expenses.

3. Dental and Vision Care: Expenses related to dental and vision services, including check-ups, glasses, contact lenses, and orthodontia, may qualify.

4. Hospital and Surgery Costs: Inpatient and outpatient hospital services, surgical procedures, and related expenses are generally eligible.

5. Mental Health Services: Therapy and counseling services for mental health and substance abuse treatment may be covered.

6. Preventive Care: Many preventive services, such as vaccinations and certain screenings, are often HSA-eligible.

7. Medical Equipment: Costs for medical equipment like crutches, wheelchairs, and home oxygen equipment can be reimbursed.

8. Laboratory Tests: Diagnostic tests and lab work are usually qualified medical expenses.

9. Fertility Treatments: Some fertility treatments and procedures may be eligible expenses.

10. Long-Term Care Services: Certain long-term care services, as prescribed by a licensed healthcare provider, can be covered.

What Does Not Qualify as a Medical Expense for Your HSA?

1. Non-Prescription Drugs: Over-the-counter medications (e.g., aspirin, cough syrup, vitamins) are typically not HSA-eligible unless prescribed by a healthcare professional.

2. Cosmetic Procedures: Cosmetic surgery or procedures primarily for cosmetic purposes, such as teeth whitening, hair transplants, or elective plastic surgery.

3. General Health and Wellness Expenses: Expenses related to general health and wellness, like gym memberships, nutritional supplements, or weight loss programs for general well-being rather than a specific medical condition.

4. Health Insurance Premiums: Health insurance premiums, including those for your HDHP. However, there are some exceptions for specific situations, like long-term care insurance premiums or certain qualified continuation coverage premiums (e.g., COBRA).

5. Non-Medical Services: Expenses for non-medical services, such as personal trainers, life coaching, or spa treatments.

6. Legal Fees: Legal fees related to medical malpractice lawsuits or personal injury claims.

7. Travel Expenses: Costs associated with traveling for medical care, such as mileage, lodging, and meals, unless the travel is primarily for medical care.

8. Child Care: Expenses for child care services, even if they are required due to a medical condition.

9. Funeral Expenses: Costs related to funeral or burial services.

10. Veterinary Expenses: Expenses for the medical care of pets or other animals.

Conclusion

As open enrollment season progresses, consider the many benefits of having an HSA. The triple tax advantages, employer contributions, investment potential, control and flexibility, and portability make HSAs an attractive option for managing your healthcare expenses. Take the time to evaluate your financial needs and healthcare priorities, and see if an HSA aligns with your goals. It might just be the key to maximizing your healthcare and achieving financial peace of mind.

When it comes to your healthcare decisions, an HSA could be a valuable asset that benefits you not only today but in the years to come. So, make sure to explore your options during open enrollment and make the choice that best suits your needs.

If you need help with your financial planning or guidance on how to maximize on tax savings, consider connecting with us.

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