Say hello to the HSA

Healthcare in America is controlled by all sorts of levers and dials.  From insurance premiums, doctor co-pays, hospital visits and costs of medicine, there can be a lot to remember.  There are also different types of accounts which the IRS allows us to fund tax free for our healthcare expenses.  Previously, I wrote about the Flexible Spending Account (FSA), which allows you to set aside a certain amount of money before taxes towards your healthcare expenses.  This is a great benefit for people who usually pay a lot for doctor visits and medications or have a planned procedure in the upcoming year.  These funds are gone at the end of the year, so you definitely have to plan accordingly.

Another type of account is the Health Savings Account (HSA), which is similar to the FSA in that you set aside some money before taxes for healthcare costs, but it is different because that money is yours for life because the account belongs to you, not to your company.  There are some other differences between the two accounts that are worth noting.  My company started offering HSA’s in 2013, but I didn’t sign up for it then because I didn’t fully understand it.  I signed up for it this year (specifically, I signed up for the health plan that ALLOWS me to sign up for an HSA), and am pretty excited about the possible benefits.

HSA’s are accounts you can sign up for in conjunction with so called “High Deductible Health Plans” (HDHP’s).    These insurance plans are being offered more and more lately and will probably become the norm in a few years.  These plans don’t pay for pretty much anything until you meet the deductible amount, which is higher than most other plans.  Hence the name.  For 2014, a plan with a deductible of at least $1,250 for single and $2,500 for family will qualify as an HDHP.  The plans promote and fully cover most annual visits, like your yearly physical and recommended exams for kids.  By promoting yearly “maintenance” exams, the hope is to bring healthcare costs down in the long term.  Time will tell if this works or not.

Once you sign up for one of these plans, which I recently did, you are eligible to sign up for an HSA.  Most companies have a certain bank’s HSA they are associated with and some will even contribute some money into your HSA if you decide to sign up with them.  If your company offers that, definitely sign up with them.  They will take care of setting aside your pre-tax money into the account along with depositing their portion.

For 2014, you can contribute a maximum of $3,330 for an individual and $6,550 for a family.  The portion your company may contribute counts towards this portion, which is different from a 401k company match as only YOUR contributions count towards the maximum.  You can contribute as little as you’d like or up to the maximum.  This money is yours and yours alone to use.  There is no “use it or lose it” rule and some accounts offer investment options or a small amount of interest paid.  This is a huge difference from FSA’s as you actually stand to benefit by leaving your money in the account to grow, rather than scrambling to spend it all in December.

HSA’s are very tax friendly.  They offer a triple whammy when it comes to tax advantages.  First, your money is set aside pre-tax, so you don’t pay any taxes on the money you contribute.  Second, as I mentioned before, some accounts have investment options or pay some interest.  Any gains from this grow tax free inside of your account.  Third, any money you decide to withdraw and use for eligible healthcare expenses is not taxed either.  As a bonus, if you have money in this account when you turn 65, you can use HSA money for ANYTHING, but you will have to pay income tax on it.  But no 20% penalty (ouch!) which you would get if you used the money for non eligible expenses before 65.  In a way, your HSA can serve as a kind of retirement account once you turn 65.

What’s an eligible expense with an HSA?  Doctor visits, surgeries and prescription medications.  You can also use it for glasses, contact lenses and dental work.  You can click on the IRS website for specifics.    You would want to use HSA for those expenses which count against your deductible, like doctor visits and medications.  Once you meet your deductible amount, your insurance plan will start to cover almost everything.

Many young people are hesitant to sign up for High deductible plans and HSA’s because of the perceived high cost of doctor visits.  True, you will probably pay more for a doctor visit on the new plan, but you will probably go to the doctor more when you get in your 50’s or 60’s than you will now.  So it’s a good idea to contribute as much as you can to your HSA while you’re young so you have the money later when you or a family member inevitably need more care.

HSA’s in conjunction with HDHP’s are definitely something to consider, as they are becoming more and more commonplace.  A lot of the plans under the Affordable Care Act are HDHP’s, so you will probably see private companies following suit.  Talk to your human resources department and weigh the benefits of your different plans to see if an HSA would be right for you.