Picking a health insurance plan is complicated enough. But what do you do if your employer or plan offers a health savings account? How will that affect your choice of health insurance? And if you’ve decided on a health savings account, how do you use it?
Health savings accounts come with both advantages and disadvantages. They can help pay medical expenses, but your money is constrained by the limits of the account.
What Is a Health Savings Account?
A health savings account, or HSA, allows you to set aside money before taxes to pay medical expenses. It generally comes with a high-deductible health insurance plan. Your employer, for instance, may offer a plan with a $5,000 deductible. But, as you don’t have $5,000 lying around to cover that deductible, your employer may sweeten the deal with an HSA where you can save money, pre-tax, to cover that expense. In many cases, the employer will also contribute to this account.
If your insurance does not come with an HSA, you can also open one on your own, but only if your plan has a deductible over $1,400 for an individual, or $2,800 for a family. An HSA comes with contribution limits: $3,650 for individuals, and $7,300 for families. That’s the total that can be deposited into the account annually by both you and your employer. All of this money is pre-tax, and any gains the money makes in the account are also untaxed, if you choose to invest while the money is in the account.
What Can You Use the Money For?
You can withdraw from your health savings account for a long list of qualifying medical expenses, including:
- Deductibles
- Copays
- Prescription drugs
- Dental care
- Vision care
- Psychiatric care
- Menstrual products
- Crutches
- Hearing aids
- Smoking or drug cessation programs
- Breast pumps
- Acupuncture and chiropractic care
- Diabetes supplies
Under the CARES Act, you can also use your HSA for over-the-counter medicine and personal protective equipment like masks. You may not use your HSA to pay your plan’s usual premium, unless it’s a Medicare or COBRA plan.
As you can see, your HSA is an excellent resource for things insurance may not cover. Insurance is notorious for rejecting types of treatment or supplies, but if an item is on the list, it’s a valid use of your HSA funds.
After you turn 65, you can withdraw from your HSA without penalty for non-medical expenses, but you will pay taxes. Some people use this as a general retirement fund, but since healthcare can be expensive during retirement, it makes good sense to use HSA funds for your medical expenses after you retire as well. You can spend them on your Medicare premiums, prescription drugs, or long-term care.
Should You Have an HSA?
Advantages
- The money can be contributed before taxes, and the withdrawals are also tax-free if spent on qualifying medical expenses.
- Money in the HSA does not go away—you can continue to add to it year after year, building a fund for medical emergencies or expenses. Some even save their HSA for medical costs in retirement.
- Your health savings account goes with you after you leave the plan or your employer.
Disadvantages
- You can only open one if you have a high deductible health insurance plan.
- You can only contribute up to the annual limit each year.
- Unless your employer contributes, you’re still going to have to cover that high deductible yourself, just with pre-tax money.
- If you withdraw money for expenses other than qualifying medical costs, you will pay a 20% penalty as well as tax.
- You can’t pay your usual health insurance premiums with it, only Medicare or COBRA premiums.
So is contributing to an HSA a good deal? It depends on your circumstances. If your employer will contribute, it’s almost always a good idea to agree. But if not, it may be more convenient simply to save the money. It depends on your tax situation. If taxes are a significant worry, an HSA is worth the extra hassle.
What if your choice is between a high-deductible insurance plan plus an HSA and a low-deductible plan with no HSA? If you have plenty of savings to contribute to the HSA, the high-deductible plan may save you money. But if you live paycheck to paycheck and your employer won’t contribute to the HSA, you might be wiser paying more for a low-deductible plan. You’ll have trouble funding the HSA and paying your deductibles in the event of a medical problem.
Get Good Advice
Selecting a new health insurance plan is a good time to consult with your financial advisor. The financial implications of the plan you choose may be complex. To set up a meeting with the right advisor for you, contact us today. You can get the most informed advice about health savings accounts, your insurance plan, and more.
