Rarely can you anticipate a medical emergency. They come up out of nowhere, and sometimes the costs can blindside you. It’s true that this is why we have insurance, but even insurance isn’t foolproof. Many people are limited in what insurance they can get, and it’s not always enough to cover the cost of what they may need to get better. In some cases, you can open an HSA to help you out even more.
What is an HSA?
An HSA is a tax-advantaged savings account that you can use to pay for qualified medical expenses tax-free. The account is designed for those who are already enrolled in a high-deductible health plan. The HSA will help cover the associated out-of-pocket costs such as eligible premiums and the high, difficult to manage deductibles.
What is an HSA: Eligibility
In order to qualify for an HSA, or health savings account, you must already be enrolled in a high-deductible health plan. There are no exceptions to this. A high deductible health plan is a form of insurance where you have agreed to pay a very large deductible in the event of a medical cost. The insurance will then cover everything beyond the agreed-upon deductible.
Higher deductibles mean much lower monthly premiums, which some people or families need. However, this can become tricky when it comes time to actually pay these deductibles. This is exactly why an HSA is there.
The deductible itself will depend on the plan you choose and whether or not you have a family, but there is a range:
- Singles have a minimum deductible of $1,350 and a maximum of $6,750.
- Families have a minimum deductible of $2,700 and a maximum of $13,500.
These are the amounts you be responsible for before the insurance company will cover the rest. This is why many will have use for an HSA – deductible costs can be extremely high. Knowing these high deductibles are in place can be stressful for employees who know they can’t afford them should an emergency occur. High amounts of worry and stress can bring employee engagement down. An HSA can help alleviate some of this pressure.
The money in a health savings account is still yours, but you save because of the tax benefits it gives you, which are multiple:
|HSA Tax Benefits|
|Contributions||They are either pre-tax (employer plans) or tax deductible (individually obtained).|
|Growth||You won't have t o pay taxes on the growth of the account.|
|Withdrawals||The money you withdraw will not be taxed.|
Essentially, an HSA insurance plan is a way for you to save up for the high cost of those pesky deductibles while saving some money on the tax benefits. It’s perfect because the money will roll over from year to year, unlike a flexible spending account where the funds are lost if you don’t’ spend your maximum each year.
This means you can keep saving and saving. As long as you don’t use it, the money will always be there even years later. If you still have savings when you’re 65, the money will even extend into tax-free spending on medical expenses during retirement. This is one reason an HSA can be an important part of compensation management – it’s something that will last.
Once you retire, however, you can start withdrawing the money for anything you want – though you will pay taxes on non-medical withdrawals.
Health Savings Account Limitations
Like any health or benefit plan, there are limitations to HSA insurance. The account itself does have IRS-mandated limits for each year. Individuals are limited to $3,500/year and families are limited to $7,000. For those over the age of 55, an additional $1000 can be added each year.
However, the beauty of these accounts is that anyone can contribute. The largest contributor will likely be yourself, but that’s not stopping anyone else. Employers can contribute if they wish, as can relatives or anyone else that wants to help.
There are also, of course, limits on what the money can be spent on. Any medical expense or treatment administered by a licensed medical practitioner will be covered. This includes:
- The cost of diagnoses
- Costs related to curing a disease or illness
- The cost of mitigation
- Dental treatment
- Doctor’s office visits and copays
- Flu shots
- Eye exams and glasses
- Physical therapy
- Non-cosmetic surgery
In addition to these things, over-the-counter medication can be purchased with an HSA if they were prescribed by a doctor.
While many health plans are managed and essentially “owned” by employers, an HSA is entirely yours. You open and manage it on your own. Your current employer may choose to make or match contributions, but the money then becomes yours.
The account will follow you wherever you go, even if you change jobs or move cities. Often, you can move the HSA into a new employer’s program, if they are also willing to make or match contributions.
But, you don’t have to do this – the money that’s already in there is yours to spend on medical expenses regardless.
Health Savings Account Disadvantages
There are many benefits and advantages to opening a health savings account if you are eligible. Anyone can contribute, there are multiple tax benefits, and the list of allowed medical expenses is vast.
But, the plan doesn’t come without flaws. There are a few disadvantages to HSA insurance plans that you should consider and be aware of before you get started:
- The maximum. There is no doubt that an HSA is useful and good to have, but it’s not unlimited. The yearly maximum means that if you want to save lots and lots of money, you can’t do it with the HSA. Of course, you can always put the additional money you’d want to save in another savings account, but it likely won’t be tax-free money.
- Those who rely on an HSA often do not receive preventative care or other routine medical appointments. This is because they don’t want to drain their HSA should they need it for a true emergency. However, lack of prevention and routine care can lead to more health concerns that then become even more expensive than the prevention itself.
- HSA insurance doesn’t do much for chronic conditions. Because of the way the HSA insurance plan is structured – you must meet your deductible before receiving any coverage – having smaller but more frequent procedures or appointments covered likely won’t happen. This makes things like asthma, diabetes, COPD, and other chronic illnesses quite challenging.
Despite these disadvantages, however, opening and contributing to a health savings account can be worth it. There are plenty of times where the money becomes useful, or perhaps even life-saving.
The Importance of a Health Savings Account
While it may not be the best plan for everyone, the availability of HSAs is important for those that it does help. Someone with a chronic illness or a very large family might want to consider other options. But, a single person who is generally in good health can benefit greatly from this extra emergency fund as well as the tax benefits that come with it.
It’s also an important thing to have due to the attachment to the individual. Many benefits plans are lost or forfeited when changing jobs, and that can be a stressful factor when finding a new one. Health benefits are a huge consideration and play a huge role in employee retention. But the fact that your HSA moves with you and not be affected is helpful. It can also offer some much-needed peace of mind.