In recent years, you may have noticed increasing emphasis on Health Savings Accounts (HSAs), whether through your benefits plan administrator, in the news or in conversations with acquaintances. If you have, it’s for good reason. HSA membership has been growing steadily year over year, with the number of accounts jumping to 20 million in 2016, a 22 percent increase from the year before.1
But what is it? HSAs are used specifically to pay for approved health care expenses, and they’re on the rise as employees look for ways to manage the costs of high-deductible health plans (HDHPs), which have become more common in recent years. An HDHP is a health insurance plan that has a high deductible, which means more out-of-pocket costs are shifted to the consumer before insurance coverage kicks in. If you’re an employee with benefits, an HSA is funded by using deductions straight from your paycheck that do not get taxed. HSAs generally provide these key tax advantages (which may vary by state):
- Contributions are tax-deductible, so they reduce your federal income taxes owed.
- Assets in your HSA account usually grow tax-free, at least at the federal level.
- Funds can be withdrawn without being taxed if you use them for qualified medical expenses.
What is considered a high deductible?
How large does a deductible need to be to be considered high? For individuals, an HDHP is a plan with a deductible of $1,300 or more. For families, an HDHP is a plan with a deductible of $2,600 or more.2 So, for example, if your visit to a specialist is $150, and your deductible is $2,000, it will take over 13 visits for any insurance benefits to take effect. (Then, there are typically copayment costs on top of that you may still have to pay.) In fact, one in three employees with an HDHP say that, because of these high out-of-pocket costs, they’ve skipped a visit to the doctor, delayed a recommended procedure, failed to fill a prescription or avoided a blood test or X-rays.3 But stocking your HSA for immediate health care expenses can help manage this financial concern.
What’s the difference between an HSA and an FSA?
You might also be wondering what the difference is between an HSA and a Flexible Spending Account (FSA), another account that helps you save for health care expenses. There are some big differences between the two. Perhaps the biggest is that when you put money into an FSA, you will need to use it by the end of the year. If you don’t, it’s gone forever. But with an HSA, the money can be rolled over year to year, indefinitely. Then, while an FSA is tied to the employer, a HSA is tied to you. That means, if you change jobs, you lose your FSA account (and the money). In addition to keeping your money, you can earn interest on an HSA account by investing it in the market, like you would a 401(k). Another bonus: Like a 401(k), there may be a company match on your HSA.
Knowing the key differences between your accounts can help you plan for medium- and long-term health care expenses. HSAs are especially useful if you anticipate an upcoming procedure (or if you’re expecting to have a baby). You can plan for these expenses by adding to your HSA in advance. Then, for the long term, an HSA can also be an effective retirement tool. When you continue to contribute, roll over and invest in your HSA, it can grow to a sizable amount by the time you retire. This last part is important. Like a 401(k) or an IRA, you can place your HSA money in a mutual fund, and you can even choose the plan administrator, the financial organization that will manage the account.4 Given that health care costs tend to rise over time, this ability to manage the account can be an advantage for savers. If you max out your contributions ($3,450 for independents and $6,900 for families in 2018) and manage them well, HSAs can be used to pay for medical expenses, and in the process help preserve retirement income.5,6 HSAs can even be used to cover costs related to a retirement community, nursing home or long-term care service.7
Supplemental health solutions
The rise of HDHPs has created a need, more than ever, for supplemental insurance. Supplemental insurance, which refers to insurance coverage like accident, critical illness, cancer and hospital indemnity, can alleviate the out-of-pocket expenses associated with HDHPs. Read more about how supplemental insurance can help with health care uncertainty. What’s more, supplemental insurance can work as a complement to your HSA by letting you keep money in your HSA while using the direct payments you get from your insurance to pay for health care costs. The more you accumulate in your HSA, the greater asset it becomes.
With a little background knowledge and some insight, there are some effective things you can do to help manage your health care costs with an HSA, both for now and into the future. For further information on HSAs and ways to use them, speak with your benefits representative.