If you’d like to pay less in health insurance premiums while still accessing high quality health care, reduce your taxes, and save for future health needs, consider setting up an HSA, or health savings account.
The good news is that it’s never been easier to set up an HSA. The bad news is that not everyone qualifies. Here’s what you need to know about how to qualify for, and set up, an HSA.
What is an HSA and How Do You Qualify?
An HSA, or health savings account, is a tax sheltered savings account similar to an IRA, but earmarked for medical expenses. To qualify, you must have coverage from a high deductible health insurance plan (HDHP) and you must not be enrolled in Medicare or be listed as a dependent on someone else’s tax return.
Unlike traditional health insurance where you pay higher premiums in exchange for low out-of-pocket costs like co-pays and deductibles, an HSA, combined with a high deductible health plan, gives you lower premiums for major medical coverage (also known as “catastrophic” coverage), which kicks in after the high-dollar deductible is met, and the ability to save and pay for the deductible and other qualified medical and dental expenses with pre-tax dollars.
What are the Benefits of an HSA?
1. The contributions you make to your HSA are tax-deductible.
For federal income taxes, you may deduct “off the top” from your adjusted gross income the total amount you contributed to your HSA for that calendar year, whether you itemize your deductions or not.
2. HSA funds roll over and accumulate year to year if not spent.
Unlike flexible spending accounts which you must “use or lose” each year, your HSA funds are yours to keep. As your HSA account grows, funds are available for future medical expenses and even retirement. At age 65, you can withdraw from your HSA for any purpose, not just medical, without penalty – you’ll just need to pay tax on your withdrawal as regular income.
3. You can withdraw funds from your HSA tax-free for qualified medical expenses.
Qualified medical expenses include most medical, dental, vision, and prescription costs, as well as chiropractic visits and acupuncture. Long-term eldercare or nursing home and retirement facility expenses also qualify. Here’s a list of qualified medical expenses that can be paid for tax-free.
4. HSA funds earn interest and grow tax-free.
The amount of interest that is paid varies depending on the financial institution, so be sure to check around for the best deal. My credit union currently offers a four-tier rate structure, based on my HSA account balance, that beats other local banks. HSA accounts are FDIC & NCUA insured up to $250,000.
Once your HSA account balance reaches a certain threshold ($2,000 or $2,500 at many financial institutions) your account administrator may allow you to transfer a portion of your HSA funds into a range of investment options that could earn potentially higher tax-free returns, like CD’s, mutual funds, stocks, bonds, etc. While CD’s do offer a guaranteed rate of return and are FDIC/NCUA insured, it is important to note that the other investment options are not guaranteed (in other words, you could lose it) or FDIC/NCUA insured.
How to Open an HSA
There are three basic steps to setting up an HSA:
1. Enroll in a qualified high deductible health plan.
You cannot be covered by any other type of health insurance plan (including an HMO or PPO). There are two basic ways to enroll in a high deductible health plan:
- Through your employer: If you have employer-sponsored health insurance, check with your benefits manager at work to see if they offer a high deductible health plan with HSA. If they do, find out when you can enroll (you may need to wait until the next open enrollment period before you can switch from your traditional insurance to the HSA/high deductible plan). You’ll also want to find out how much money, if any, your employer will contribute to your HSA. Some will provide the maximum that is allowed by law, and others pay a portion, leaving the employee to self-fund the balance.
- On your own: If you are not covered by an employer-sponsored health insurance, you can enroll in a high deductible health plan on your own. To learn which HSA plans are right for you, contact your local insurance agent or search online for HSA providers in your state through eHealthInsurance.com.
2. Open an HSA savings account.
You can open an HSA account (also known as a “custodial account”) at your bank, credit union, or other authorized brick and mortar or online financial institution (also known as your HSA “trustee,” “custodian,” or “administrator”).
As with any financial product, interest rates, account minimums, and fees vary, so it pays to shop around. Personally, I’ve found that my credit union offers the best overall HSA deal in my community with competitive interest rates, no minimum balance requirement, and no monthly fees.
It takes about 10 minutes to sign up. You’ll need to provide proof of ID, your social security number, and proof of your high deductible health plan. You’ll also need to designate your beneficiaries – the people who will receive your funds should you die.
3. Fund your account.
Some HSA administrators will require you to make a minimum initial deposit at the time you open your account. At my credit union, I could open my HSA with as little as $1.00! Other than that, you may fund the account however you want to: All at once, monthly, or as needed.
HSA contributions can be made by yourself, your employer, a family member, or any other third party, but the aggregate total contribution cannot exceed the maximum allowed by the IRS, which changes from year to year. For 2012, the maximum contribution for an individual is $3,100 and for a family is $6,250 (in 2013, it adjusts to $3,250 for an individual and $6,450 for a family).
If your employer offers any kind of HSA contribution on your behalf, you’ll need to provide them with your HSA’s routing and account numbers so they can make their contribution via direct deposit.
Is an HSA right for you?
In general, an HSA is a great health insurance option for people who are in relatively good health and make infrequent doctor visits, those who utilize chiropractic and naturopathic medicine (which are not covered by many traditional insurance plans), along with individuals or families who need major medical coverage at a value price.
Interestingly, this describes my family of seven exactly! We’ve had an HSA with a high deductible health plan for six years and have really appreciated the lower premiums and higher savings it has afforded us.
However, if you have chronic health issues, need to visit the doctor frequently, or have expensive prescriptions that you take every month, an HSA may not be the best option for you because your health expenses will continuously eat into your HSA balance, you won’t have much opportunity to save for future medical expenses.
Do you have an HSA? How well has it worked for you? Leave a comment below!