Why You Should Set up a Health Savings Account (HSA) with your High Deductible Health Plan
August 1, 2020
By Pam Bauerly
Senior Payroll and Benefits Coordinator
As more companies offer less expensive, high-deductible health plans to their employees, more and more people are eligible for Health Savings Accounts (HSAs) — but only a fraction of folks know what HSAs are, how to use them, where to set them up, or why they should get an HSA in the first place!
At Security National Bank, we're here to help you sort it all out.
What is a Health Savings Account?
If you are enrolled in a high deductible health insurance plan, it is typically less expensive up front (you get to keep more of your paycheck). In return, you'll take on more of the initial financial responsibility for health care expenses, before your insurance actually kicks in. This is where the Health Savings Account comes in -- you can use it to offset the out-of-pocket medical expenses that your insurance won't cover.
Benefits of an HSA:
There are several benefits to owning a Health Savings Account.
1. HSA contributions reduce your taxes.
You can either take an HSA as a pre-tax distribution from your paycheck, or deduct the money you put in an HSA from your taxable income on your tax return. Either way, contributions make it easier to save money and pay for qualified medical expenses.
2. HSA withdrawals are also tax-free.
As long as the money is used for a qualified medical expense (according to the IRS), you won’t pay taxes on those funds. You can also use the money for non-medical expenses, but at a steep cost — you’ll not only be charged taxes on the amount you withdraw, but you’ll also incur a 20 percent pre-withdrawal penalty unless you are over the age of 65. Once you reach retirement age, the non-medical expense penalty goes away — but not the tax obligation.
The short story? Make sure you use your HSA funds for actual medical expenses.
3. HSA funds roll over from year to year.
Unlike a “Flex Spending Account” (which people with low deductible health plans sometimes use), any HSA funds you don't use this year will always roll over to the next. As long as you have an active high-deductible health plan, you can keep contributing to your HSA. If a time comes when you no longer qualify for an HSA, the account remains intact and available for your medical expenses; you just can’t contribute more money while you aren’t enrolled in a high-deductible plan. You will never lose what you put in!
4. HSA funds are interest bearing.
Your HSA funds gain interest, which can help bolster your saving power. You can usually decide whether you want to invest the funds into the stock market (if you don't plan on using them right way), or keep them in a lower interest (but more fluid) cash account.
5. HSA funds are available to you and your family.
HSA funds can be used by any family member who qualifies as your tax dependent, even if they aren’t covered under your health care insurance plan.
6. HSA funds are easy to access.
Your HSA account actually works like an interest-bearing checking account. It even comes with its own debit card and bank statement, making it easy to access the funds when you need them. Just remember: an HSA is also a self-auditing account, which means you should keep all receipts so you can prove they were used for medical purposes if you're ever audited.
7. An HSA can supplement retirement savings.
Being enrolled in a qualified high-deductible plan and actively contributing to an HSA can be a smart move for your retirement planning, especially if you are currently healthy and make minimal withdrawals. Since you never lose the funds in the account, and since your medical expenses will likely increase as you age, having additional funds in an HSA will allow you to stretch your other retirement savings a bit further. Also, once you turn 65, your HSA funds can be used penalty free to pay for Medicare supplements or long-term care premiums.
8. The HSA contribution limit in 2020 is $7,100 (per family).
While HSAs never expire, they do have annual contribution limits set by the IRS. In 2020, the maximum HSA contribution for a family is $7,100; for individuals, it is $3,550. If you are 55 and over, you can make a $1,000 additional catch-up contribution.
More Questions? Set up an appointment today:
Having questions about your health is one thing. Having questions about your health insurance, or your health savings plan, is another. Schedule an appointment with one of our experts today, and discuss whether opening an HSA account would be right for you.