HSA stands for Health Savings Account, which is a tax-advantage savings account that works in conjunction with your insurance plan to help you pay for eligible medical expenses. It’s available to families or individuals who enroll in a high-deductible health plan (HDHP). The money is deposited pre-tax into the account, meaning that money is not subject to federal income tax.
An HSA is very different from an FSA (Flexible Spending Account). FSAs are offered by employers to employees, and are “use it or lose it,” so if you don’t use the account funds by the end of the year, you lose them. With HSAs, any money leftover at the end of the year rolls over and accumulates year after year.
Qualifying for an HSA
You must have an HSA-qualified high-deductible health insurance plan, which is dictated by IRS guidelines. For 2016:
- An individual plan: minimum deductible of $1,300.
- A family plan: minimum deductible of $2,600.
You will find that most HSA-qualified plans have deductibles closer to $6550 for individuals and $13,200 for families, but HSAs were designed to help you cover these higher out-of-pocket costs by providing you with a tax break on the funds and paying a lower monthly premium.
Most insurance companies offer their use of a bank for the account, however, you do have a choice. I would advise using your own bank when possible, since you may shop every year for a different health insurance policy, and may not stay with the same insurance company year to year. This also makes transferring and accessing funds easier.
How does an HSA Work
After you enroll in a qualified plan, you will need to open the account at a bank. You should do some research on what banks have the best rates, and make sure to ask about the monthly usage fees, as well. You will need to fund the account, and will usually receive a debit card to use for your purchases.
The funds in the account can be used for eligible medical expenses, such as copays, coinsurance, deductible, and prescription drug copays. You may also use the HSA for other expenses that are not covered by your health plan, eye care, and dental expenses. Withdrawals for non-medical expenses are subject to a 20% tax penalty.
HSAs aren’t for everyone. Most people that use an HSA are looking to lower their monthly insurance premium and get a tax benefit. Usually, they are in a good health and don’t need health care on a regular basis. They prefer to finance their health care as they go, instead of buying a platinum plan with a lower deductible that costs twice as much per month and has no tax benefits.
The good news is that with the affordable health care law, you may shop every year for a new plan, so you are not locked into a plan forever, should you find it’s not the right one for you.