You'd think that paying for your health insurance would be as easy as paying for anything else. I mean, we live in a world where just about anything, including a tank, can be paid for with the touch of a button.
But what many people don't know is that there are a few ways to manage your health insurance costs. And if you think long-term when budgeting, there are available avenues that make it easier to plan for your yearly healthcare costs. No matter what, nobody wants to be caught off-guard when it comes to medical expenses, especially when you consider that they are one of the top 10 reasons people go bankrupt. That's where an HSA comes in.
What is an HSA?
Most of us have a savings account, right? Well, why do we have a savings account? In case our car breaks down, we lose our job, start a business, or have an emergency. In the same way, there's a special savings account for medical emergencies called an HSA (Health Savings Account).
Think of it as an emergency fund for your healthcare costs. So why should you save using an HSA vs. a regular savings account? Two words: tax benefits.
- Every cent you put in your HSA account is tax-deductible.
- Your HSA balance carries over every year.
- You can invest it like an IRA or 401K (if you’re eligible).
- You can add your HSA to your retirement funds. And, you can withdraw money from your HSA for any reason after you turn 65 (without any penalty!).
- Money in your HSA can accumulate without being taxed.
- Withdrawals aren’t taxed if you’re allocating the money toward qualified medical expenses.
- You can pay your spouse’s or dependent’s (qualified) medical costs without a tax penalty.
In short, an HSA = lower taxes every year.
HSAs are defined by the IRS, and they determine how much you can contribute annually. The limits for 2016 is $3,350 for individuals and $6,750 for families. Your employer or a family member can also contribute to your HSA, but your combined contributions still can’t go over the limit.
Who benefits from an HSA the most?
Right now you might be thinking, That sounds great! How do I sign up? Well, eligibility for an HSA is determined by two things: your health plan and age. So if you are younger than 65 and have a high-deductible plan (HDHP) – more on that later – then you might want to consider an HSA. But before we talk more about eligibility, let’s take a look at what type a person an HSA is good for.
An HSA might be right for you if you're:
- In your late 20s to early 40s,
- Are relatively healthy,
- Like to plan for your medical costs (and get tax benefits while you're at it),
- Want lower out-of-pocket payments,
- And have an HDHP.
If you've ever dealt with your health insurance plan, chances are that you've heard the word “deductible” a lot. But what does it really mean in layman’s terms? A deductible is the cap on out-of-pocket medical expenses. So if you are young and healthy and visit the doctor one to two times a year, you will probably opt for a high-deductible plan because you don't anticipate expensive procedures and multiple visits. Your biggest concern is paying a low monthly cost. But if you are older, have pre-existing conditions, or are genetically disposed to a certain condition like breast cancer, then you might want a lower deductible because you are more likely to use your insurance for expensive procedures.
High-deductible plans are great because the premiums (how much you pay monthly for your health insurance) are lower than a standard plan but, in exchange for those low premiums, the amount you have to pay before your plan kicks in is much higher. An individual will have to pay $1,300 minimum before the insurance starts paying for the costs ($2,600 for a family), according to the 2016 IRS Publication 969. And high-deductible plans all differ, so it’s really important that you know what you have to pay for upfront and what preventative services your plan covers.
So where does an HSA factor in all of this?
Money deposited in your HSA can go toward those deductible expenses, copays, etc. It depends on the kind of HSA you have. You have two options for handling your deposit:
1) You can have your contributions automatically deducted from your paycheck pre-tax (if your employer offers this option), or
2) You can write a personal check or set up online deposits through your bank to make a one-time or recurring contribution to your HSA from a checking or savings account, deducting your contribution on your income tax return by using IRS Form 1040 and Form 8889.
To qualify for an HSA, you generally can’t have any other kind of insurance other than an HDHP. And if you do have additional insurance, it must stick to these guidelines as defined by the IRS:
- Liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property.
- A specific disease or illness.
- A fixed amount per day (or other period) of hospitalization.
Fortunately, having vision, disability, long-term care, dental insurance coverage doesn’t prevent you from qualifying for an HDHP.
That’s an HSA in a nutshell. Determining whether it’s the right choice for you depends on your healthcare needs and whether you qualify. You can sign up for an HSA through a bank or your employer can set one up for you (if they offer it as an option).
The above information only serves as a general guideline for an HSA. To know exactly what you’re getting out of your specific HSA, you’ll need to read the documentation carefully. And remember, this is one option out of many. In future articles, we’ll explore the other options available to help you manage your healthcare costs.
Here are some helpful resources that can answer any more questions you might have: