What Is The Health Savings Account (aka The HSA)?

Published by Angela Lim on

Health Savings Account (HSA) Illustration Drawing By Julie Lim

What Is The Health Savings Account (aka The HSA)?

Health Savings Account (HSA) Illustration Drawing By Julie Lim

The Basic Definition

The Health Savings Account (HSA) is a health related tax advantaged account (don’t worry I’ll break this down later) that you can contribute to if you have a high deductible health plan (HDHP). The HSA is like a bank account that’s specifically for health related expenses. The benefits of the HSA versus a regular bank account are the special tax advantages that HSAs offer, similar to the IRA and 401k. However, unlike those other tax advantaged accounts, the HSA is a TRIPLE tax advantaged account! With HSAs, you get to enjoy tax benefits through contributions, gains through any interest and/or investment growth, and even through withdrawals for qualified medical expenses. With an IRA and 401K you only get 2 out of 3 of those benefits. Interested? Then let’s learn more about the nitty gritty.

Is it really worth it though?

In short, yes – I mean that’s why I wrote this post! Let’s go over the benefits in more detail. 

  • Triple tax advantaged account – Again, this is a truly tax free account for most folks. You can choose to pay off medical expenses with pre-taxed income or choose to invest your HSA contributions and allow your contributions to grow tax free to use later. *Note: As of August 2020, you can enjoy the triple tax free benefit for US federal taxes and 48 state taxes, excluding California and New Jersey. California has recently introduced a bill to align with federal HSA law but it’s still pending.
  • Sometimes employers help fund HSA accounts – Some employers contribute a certain amount towards your HSA if you’re enrolled in the HDHP and HSA. Employers actually get a tax benefit from contributing to their employees’ HSAs as well. My company offers $500/year which is usually way more than I averagely spend towards health related expenses as a young person with no health conditions.
  • Lots of flexibility
    • Reimburse your future self You can pay yourself back for any previous qualified medical expenses you paid for. This benefit only applies to expenses that were paid for after you officially opened your HSA account, so make sure you keep your receipts. For example, say you had to pay $2,000 out of pocket for a small surgery, but had an emergency fund you’d rather withdraw from to allow your HSA contributions to continue growing. Well, if you kept a record of the receipt and 5 years later decided you wanted to take $2,000 from your HSA fund for a vacation, you can choose to pay yourself back for that $2,000 surgery. There’s no reimbursement period so you can pay yourself whenever!
    • Ability to choose your HSA provider – As long as you’re qualified, you can choose who your HSA provider is, even if your company already has a HSA provider picked out. However, if your company has a pre-selected HSA provider, allows HSA contributions to be made via payroll (more specifically a cafeteria plan), and there’s little to no HSA fees, I’d stick with your company’s HSA provider. Doing so allows you to avoid paying FICA taxes (Social Security and Medicare taxes) of 7.65% on HSA contributions. Otherwise, you’d miss out on that sweet additional 7.65% in tax savings. Also, if your employer helps fund your HSA they may only do so if you’re enrolled in their selected HSA provider. If your company doesn’t have a pre-selected HSA provider or the one chosen is truly terrible, Fidelity is currently offering a no minimum, fee-free HSA.
    • HSA funds can be invested or kept in cash – So actually, HSAs are way better than bank accounts because you can choose to keep the funds in cash, invest it, or do both! If you invest it, I suggest investing in index funds like VSTAX, VTI, or something equivalent. If you want to be very conservative, you can even invest in bonds, your choice!
    • You can use the HSA like a Traditional IRA – Angela, what if I’m Chris Traeger irl (Parks and Rec reference) and never have any health expenses until death?! First of all, if that’s really you, please teach this 26 year old trapped in an 80 year old body how you do it. Secondly, no worries Traeger, all those additional HSA savings won’t go to waste because once you’re over 65 years old, you can withdraw funds from the HSA account for any reason, penalty free! You’ll just have to pay income tax on the withdrawn funds like you would with a Traditional IRA.
    • You keep your HSA even when you switch companies or switch to a non HDHP – Again, like the IRA, the HSA is a personal account and therefore doesn’t disappear due to a company change, job loss, health plan switch, etc. Whatever you contribute will stay yours! One thing to note is that companies typically pay the HSA monthly fee on behalf of their employees and if you leave the company, the fees will most likely come out of your HSA account. However, the IRS allows HSA holders to “roll over” HSA funds to a new HSA provider every 12 months so if the fees are expensive you can choose a better HSA provider.

Are there folks who shouldn’t get HSAs?
If you have no choice but to choose a HDHP then it’s definitely worthwhile to open an HSA and contribute if you can due to all the tax benefits, even if you’re a Californian or New Jeseryan. However, if you have known major health issues and have access to a non HDHP that is better suited for your specific situation it may be a better idea to skip out on the HSA and HDHP. Carefully read over your company’s different health plans and choose what’s best for you and your family!

How To Qualify

As I mentioned before, you need to be enrolled into a high deductible health plan (HDHP) to be able to contribute to an HSA. Note, choosing an HDHP over other health plan options may not be the best choice for you and/or your family. In 2020, the minimum deductible is $1,400 for a plan with only one insured individual, or $2,800 for a plan with multiple insured individuals. A deductible is the amount you have to pay out-of-pocket (meaning without any help from the health insurance company) before the health insurance company starts helping with healthcare expenses. 

You also have to meet the following criteria:

  1. Have no additional health coverage (i.e. have coverage under more than 1 health plan)
  2. Not enrolled in Medicare or TRICARE
  3. Can’t be claimed as a dependent on someone else’s 2019 tax return
  4. For family HDHP, you must meet the deductible qualification, the above 3 criteria, and have at least one other individual covered as well (e.g. your spouse, children, etc.)

What if I had a HDHP for only part of the year? Technically if you were HSA qualified as of December 1st, you can make a full year contribution by that year’s HSA deadline.This is called the “Last Month Rule.” For example, if you were HSA qualified on December 1, 2020 you could technically make the maximum HSA contribution for 2020. However, you can be tax liable for some/most of the contribution amount + owe a 10% penalty fee if you fail to remain HSA qualified for the next 12 months, which in this case is until December 1, 2021. So, say you moved companies in November 2021 and signed up for a non HDHP, you’d owe a hefty penalty and taxes. More info here. If you want to play it safe, I recommend only contributing up to what you’re already qualified for. For example, if you are HSA eligible from August 1st – December 31st of 2020 you would be able to safely contribute 5/12th of the maximum yearly contribution limit. 

How Much Can I Contribute?

Year 2020

  • For those with individual health plans: $3,550
  • For those with family health plans: $7,100
  • For those who are ages 55+, you can contribute an additional $1,000

Year 2021

  • For those with individual health plans: $3,600
  • For those with family health plans: $7,200
  • For those who are ages 55+, you can contribute an additional $1,000

Note: You can’t open a joint HSA with more than one account holder. So if you’re married and both you and your spouse want to contribute to HSAs, make sure that you both qualify and that the combined total contributions are no more than $7,100 for 2020. The contributions don’t have to be equal, it can be $6,000 and $1,100 or whatever other combination, but it must not be over the max amount of $7,100.

 

When Is The Contribution Deadline?

Like the IRA deadline, the HSA deadline is the same as the US Tax deadline, which is typically April 15th. For 2020 HSA contributions, the Tax deadline will most likely be April 15th, 2021 unless the IRS decides to extend the deadline, which they did for 2019 taxes.

TL;DR

  • Definition: The Health Savings Account (HSA) is like a bank account that’s specifically for health related expenses. The benefits of the HSA versus a regular bank account are the special tax advantages that HSAs offer
  • Is it worth it?: Yes, because of the tax benefits and the flexibility
  • Who qualifies?: You need to be enrolled into a high deductible health plan (HDHP) to be able to contribute to an HSA.
  • Contribution amount: $3,550 for individual health plans and $7,100 for family health plans in 2020
  • Contribution Deadline: Same as US tax deadline, which is generally April 15th
 

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