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Health Savings Account: What, How, and Why
A Health Savings Account, also known as an HSA, is an option offered by many insurance companies and employers. To better understand your options when it comes to your healthcare it's key to understand what it is, who benefits from it and why you should consider it.
What is an HSA?
Health savings accounts are offered in conjunction with high-deductible health plans. A high-deductible health plan means you will pay a certain amount upfront before your insurance covers any non-preventative costs. The deductible amount varies depending on a few factors: who you're insuring, your insurance company, and your employer. In addition, some high-deductible health plans require you to pay full price up to the deductible for things like non-preventative prescriptions while others may cover prescriptions separately without having to pay the upfront deductible.
A health savings account, or HSA, is a pre-tax savings account offered to help you save money on your out of pocket medical costs. That means the funds come out of your paycheck without being taxed and can be used tax free at any time on eligible health care expenses. Any funds you contribute in 2018 remain yours to use in the future.
There are limits on how much you can contribute each year. In 2018 individuals can contribute up to $3,450, while families can contribute up to $6,900. If you're over 55 you can contribute an additional $1,000 in 2018.
What about FSAs?
FSAs are flexible spending accounts and are often confused for HSAs. The main difference is that contribution limits of FSAs are lower and they're often tied to a more traditional healthcare plan. However, if you have an HSA you can have a 'limited purpose FSA' which allows you to set aside additional pre-tax funds for dental and vision expenses only. A limited purpose FSA is a smart way to save even more for things such as eyeglasses, contacts, and braces. While you can use your HSA for dental and vision costs, these are generally not counted towards your medical deductible.
Who should consider an HSA?
Everyone with a high deductible health plan should consider an HSA. There are three things to consider when choosing your healthcare plan:
- Your average healthcare costs: While you can't know what the future holds health-wise, you can get a rough estimate based on what services you have used in the past.
- The deductible for your high-deductible plan: This can vary greatly but starts at $1,350 for an individual and $2,700 for a family.
- How you will use HSA funds: Will you hold onto those funds for more expensive healthcare needs or will you use it to pay for every expense?
Typically your healthcare company or employer will offer a calculator to help you see the cost difference between plans.
Why should you consider an HSA?
There are three main benefits: increased savings, tax benefits, and more control over how you spend healthcare dollars.
- An HSA plan allows you to save each month for medical expenses. Since you hold onto those funds year after year and no matter where you're employed, you will be able to cover larger medical costs easier.
- The tax benefits are huge -- you are you putting money aside pre-tax, you can invest it tax free, and you can withdraw it tax free at any time. The only catch: the money has to be used for medical expenses.
- Having more freedom to spend healthcare dollars as you prefer can be a great advantage. This may mean saving up for a surgery or putting aside funds for use later in life.