Health Savings Accounts are a savings vehicle that were established in 2003 with the passing of Medicare Prescription Drug, Improvement, and Modernization Act to help Americans save for healthcare expenses. Healthcare expenditures have continued to climb throughout the decades with the average cost around $10,739 according to a study in 2017. There have been many disagreements across government about the best way to solve our healthcare crisis and while we certainly don’t have a resounding answer, HSAs have helped Americans self-fund some of their healthcare costs.
HSAs are offered to people who are covered by a high deductible healthcare plan. What is a high deductible healthcare plan? It qualifies as high deductible if the deductible is $1,400 for an individual or $2,800 for a family in 2020 (subject to change each year). A deductible refers to the amount someone has to pay out of pocket before healthcare coverage kicks in. Usually, HDHPs do cover preventative healthcare without having to spend your deductible but conceptually, people would need to spend these deductibles before their coverage would apply.
If you are covered by a high deductible healthcare plan through an employer, it’s likely you have the option to contribute to an HSA through payroll deferral and you may even have some benefit from your employer where they put in a few dollars for you each year. The maximum you can contribute does change each year so be sure to follow the IRS guidelines but for 2020, the total is $3,550 for an individual or $7,100 for a family. If you’re 55 or older, you can contribute an additional $1,000 catch up contribution.
So now that you have a basic understanding of how HSAs work, why would you contribute to one? Here are a few reasons to consider:
1) Tax Advantaged—not only do these accounts allow you to easily save money for any healthcare expenses you incur, but there are tax advantages. You get to deduct what you contribute to an HSA in the year you contribute. This means that those contributions to your HSA bring down your total income and your tax burden is decreased. HSAs are one of the few deductions that exist regardless of income so it’s one of the few tax breaks for all Americans if you qualify. Not only do tax advantages exist for contributions into the HSA but when you do decide to use your HSA for qualified medical expenses, those dollars come out completely tax free, making your dollars go further.
2) Growth Potential—HSAs offer the ability to save your dollars tax free and as long as you have the minimum requirement in cash (usually $1,000), it’s possible to invest your dollars into investment offerings. This means your cash can grow depending on how you’re invested and how the market is doing. Over the long term, this is a great way to grow your money to help you continue to fund your healthcare costs.
3) No waste—these accounts can be used for a very wide array of medical and healthcare needs so the likelihood these savings get put to use is likely. Additionally, you’re required to title the account with a beneficiary meaning that if for some reason you aren’t able to use the entire account, these dollars pass down and can positively impact whomever you choose. You’re not saving for nothing; those dollars will get used efficiently.
The first step to take advantage of an HSA is to see if you qualify by seeing if you’re covered by a high deductible healthcare plan. Your employer will usually provide all the details of the HSA that they sponsor so it’s very easy to take advantage of this savings vehicle. If you leave your current employer, you’ll want to read what happens to your HSA but for most, this account stays put and you can either roll it into a new HSA with a new employer or continue to maintain it and contribute as long as you qualify.
Is an HSA right for me?
This is a personal question that depends on your own personal healthcare needs and your family’s healthcare needs. High deductible healthcare plans are often appropriate for individuals and families that have relatively low healthcare needs and therefore it’s more advantageous to pay low premiums with a HDHP and then self-fund most medical costs through an HSA. If an individual or family has chronic conditions and/or has significant costs associated with healthcare during the year, other plans available may make sense. Always consult with your employer and/or financial professional to decide the best option for you and your family.
We don’t know what the future of the healthcare system will hold but as a step to take care of yourself, you can consider an HSA as a viable option to cover unexpected healthcare costs.
History of Health Savings Accounts (HSAs), Americans for Free Choice in Medicine , www.afcm.org/hsahistory.html.
“National Healthcare Expenditures 2017 Highlights.” Centers for Medicare and Medicaid Services, CMS , www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/highlights.pdf.
The author, Maddi Napier CFP®, MBA, QKA, FSRI is the founder and financial planner at Minerva Wealth Planning, LLC. For questions or suggestions, email firstname.lastname@example.org.