Should I Opt for an HSA?

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A Health Savings Account (HSA) is a tax-advantaged medical savings account. Unlike a Flexible Spending Account (FSA) which is “use it or lose it,” an HSA allows you to save and invest your balance for current and future medical expenses. The money in an HSA rolls over each year and there are no required distributions at any age. For 2017, the family maximum contribution is $6,750, or $7,750 for those aged 55 or older. 

An HSA must be coupled with a High Deductible Health Plan (HDHP). For a family HDHP in 2017, the minimum deductible is $2,600 and the out-of-pocket maximum is $13,100, although the specific amounts will vary by plan. With an HDHP, you are responsible for paying more upfront through the form of a deductible, however your premiums are typically lower. You can use funds from your HSA to meet the deductible for your HDHP. Often, participants hold funds in cash up to the out-of-pocket maximum for the HDHP within their HAS, and invest any excess. An HSA may be used as an alternative retirement vehicle, allowing participants to fund medical expenses in retirement tax free.

An HSA offers a triple-tax advantage: contributions are made pre-tax, the money grows tax free, and qualified withdrawals are not taxed. Qualified medical expenses are outlined in Section 213(d) of the Internal Revenue Service Tax Code, but generally include medical deductibles, co-insurance, prescriptions, dental and vision care. Following age 65, withdrawals for non-medical expenses will not be penalized, but are taxed as ordinary income, similar to a Traditional IRA. 

If you have an HDHP option at work, you aren’t required to use the HSA vendor that the health insurance company uses.  HSAs are individual accounts and don't need to be set up through the employer.  Typically, you receive a debit card to use for qualified medical expenses, or you can pay upfront and submit a request for reimbursement. 

Typically, HSAs and HDHPs make sense for healthy people who are willing to be subjected to a higher deductible in exchange for lower premiums. Your employer may contribute to your HSA on your behalf, reducing the funding needed to meet your deductible, in exchange for the lower premiums paid relative to a traditional health plan plan. If you have a chronic medical condition or may need expensive medical care in the future, a traditional HMO/PPO plan may make more sense. If you do decide to opt for an HSA/HDHP, you can switch back and forth between a standard HMO/PPO and the HAS/HDHP each year based on anticipated care, without losing your accumulated savings in the HSA. 

Before deciding which plan is best for you, be sure to review your healthcare spending over the past few years, and consider future medical needs. HSAs are a great tool to save for medical expenses – to be used now and in retirement! Be sure to reach out to your financial planner if you’d like to review your current health plan options at your next meeting.