If you’re looking for a way to offset the high cost of healthcare, you may want to consider opening a Health Savings Account, or HSA. An HSA is a savings account specifically for medical expenses that is funded with pretax dollars. While that premise is simple, a series of tax advantages make the HSA a powerhouse of an investment opportunity you won’t want to overlook.
Let’s dive deeper into HSAs to see if this type of account is right for you.
About Health Savings Accounts
As mentioned above, Health Savings Accounts (HSAs) are tax-advantaged accounts allowing people to save money for medical expenses. Contributions to HSAs are tax-deductible, and as long as the funds in the account are used to pay for qualified medical expenses, all growth and withdrawals are tax-free.
HSAs work a bit differently than other types of savings accounts. They are unique in that access to an HSA hinges on the type of health insurance you have. You can only contribute to an HSA if you have a high-deductible health plan (HDHP). For 2022, the IRS defined “high-deductible” as $1,400 per person or $2,800 per family.
The thinking behind HSAs is that people with high-deductible health plans will be more likely to save for healthcare costs if they have a designated account. Some employers may choose to contribute to the employee’s HSA’s as an employee benefit and to incentivize employees to enroll in an HDHP.
HSA as an Investment Vehicle
An often overlooked advantage of an HSA is its opportunity as an investment vehicle. The funds within your HSA are able to be invested by the account owner, similar to a 401k. This provides a unique triple-tax advantage that other types of savings accounts don’t offer.
Your HSA contributions are tax-deductible, the growth of your investments is tax-deferred, and withdrawals for qualified medical expenses are tax-free. This makes an HSA a powerful tool for long-term saving, as you’re essentially getting a triple tax break on the money in your account when you’re able to leave the funds to grow.
How HSAs Work
Now that we know a little more about what HSAs are and how they can be used let’s get into the nitty-gritty of how they work.
How to Open an HSA
So long as you meet the HSA eligibility requirements and have access to an HSA alongside that health insurance plan, HSAs are quite simple to set up.
While there will be some exceptions from one institution or provider to the next, you can often open an HSA with your financial advisor, your health insurance company, a standalone HSA provider, or even some banks.
Dechtman Wealth Management can help, too.
Our professional investment management services help you take advantage of this triple-tax-advantaged investment opportunity and others like it. Schedule a free consultation to learn more.
How to Fund an HSA
Once you have an HSA set up, it’s time to start funding it. As we see with 401k’s and other investment vehicles, there are a few different ways you can fund your HSA.
The most common way to fund an HSA is through payroll deductions if your employer offers this option. If not, you can make one-time or recurring contributions to your HSA via debit card, check, or bank transfer.
For 2022, the IRS set the HSA contribution limit at $3,600 for individuals and $7,200 for families. However, a unique situation was presented due to the inflation we’ve seen this year. In response to inflation, contribution limits were raised to $3,650 for individuals and $7,300 for families.
HSA eligibility Requirements
To meet the HSA eligibility requirements to contribute to an HSA as defined by the IRS, you:
- must be enrolled in a high deductible health plan
- cannot have any other health coverage, barring a few exceptions
- can’t be claimed as a dependent by anyone else
- cannot be enrolled in Medicare
Beyond these general HSA requirements, if it’s available to you, you’re good to utilize the account.
Qualifying and Non-Qualifying HSA Expenses
To best understand the value of an HSA, you’ll want to consider what health expenses you can pay with funds from your HSA. While we’d all love to know we’ll never face an out-of-pocket medical expense we can’t handle, that’s not always the direction life takes.
The funds in your HSA can be withdrawn to cover what the IRS deems qualified medical expenses. Before we get to the specifics of what is and isn’t covered, let’s touch on some basic ground rules:
- The medical expenses must have been incurred by yourself, your spouse, or dependents you’ve claimed on your tax return
- Funds can only be used for medical expenses incurred after the HSA was established
- The medical expenses must not be reimbursed or paid for by another party or itemized as a deduction in any previous year
With these ground rules covered, let’s get into the details of what medical expenses are generally considered qualified, making them eligible for a tax-free withdrawal from your HSA.
While it would be near impossible to share a list of all qualified medical expenses, let’s run through a healthy list to help make the concept clear.
Qualifying HSA Expenses
Qualified medical expenses for an HSA include:
- Copayments
- Prescription lenses
- Medications
- Dental work
- Hearing aids
- Long-term care
- Chiropractic care
- Orthodontics
- Psychiatric care
- In-patient mental health care
- Contact lenses
- Eye exams and glasses
- LASIK surgery
- Lab fees
- Physical therapy
- Surgeries
- Qualified medical expenses also include any preventative care services as defined by the Affordable Care Act
It’s important to note that many of the items you can use funds from your HSA would not likely be covered by a typical insurance policy.
Non-Qualifying HSA Expenses
Now that we know what medical expenses are qualified to be covered by an HSA let’s consider what isn’t. Again, this is nowhere close to an exhaustive list, but we’ll share some common non-qualified medical expenses:
- Most cosmetic surgeries
- Acupuncture
- Teeth whitening
- Health club memberships
- Maternity clothes
- Fitness programs
- Wearable tech
- Moisturizer and wrinkle cream
- Exercise equipment
- Weight loss programs
- Supplements and vitamins
- Health insurance premiums(with a few exceptions, like COBRA)
- Cosmetics
While these are some of the most common non-qualified expenses, it’s important to note that you can only withdraw money from your HSA to cover qualifying medical expenses that have not been reimbursed or paid for by another party.
Keep in mind that you’ll want to save your receipts as documentation. Your HSA provider will often require this for reimbursement requests, and it’s also good to keep on hand in case you’re ever audited by the IRS.
HSA vs. FSA/HRA/HMO
With a variety of health insurance-related investment benefits and vehicles, it can be tricky to decide what’s best based on your available options. While a Health Savings Account might not be the right choice for everyone, there are a few key features that separate it from other common options, like an FSA, HRA, or HMO.
Next, we’ll look at each of these other options, how they compare to an HSA and any restrictions that may prevent you from having the account at the same time as an HSA.
HSA vs. FSA
An FSA is a Health Flexible Spending Account that’s offered by many employers as part of their benefits package. Like an HSA, contributions to an FSA can be made with pretax dollars, which can save you money on your taxes.
There are a few key ways that an FSA differs from an HSA:
- With an FSA, you have to use the funds within the calendar year, or you forfeit them
- FSAs typically have a lower annual contribution limit than HSAs. For 2022, the FSA contribution limit was $2,850
- An FSA does not present an investment opportunity like an HSA
Can you have both an HSA and an FSA?
No, you cannot usually have both an HSA and an FSA. You are only eligible to have one or the other.
HSA vs. HRA
An HRA is an employer-sponsored benefit similar to an FSA in that unspent funds do not carry over. However, with an HRA, your employer contributes funds to cover certain medical expenses. These plans also tend to be more restrictive when it comes to what medical expenses are qualified.
Can you have both an HSA and an HRA?
Sometimes. It is the exception rather than the rule. There are some instances where you can have both an HRA and an HSA. Proceed with care and consider working with a financial advisor- errors are common, and penalties can be steep.
HSA vs. HMO
An HMO is a type of health insurance, as opposed to an investment account like an HSA. An HMO generally requires that you receive all of your care through the plan’s network of doctors and hospitals. With an HSA, you can see any doctor or use any hospital, making it much more flexible.
Can you have both an HSA and an HMO?
Yes, you can have both an HSA and an HMO. There are no restrictions that would prevent you from having both.
When an HSA is right for you
At Dechtman Wealth Management, we aim to make financial planning simple and effective. To keep it simple, here are the times when you can be confident that an HSA is probably a good idea.
You don’t get sick very often.
HSAs are a great option for people who don’t get sick very often and want to save for future health expenses. When your healthcare expenses are minimal, it’s easier to allow your HSA contributions to grow.
Ideally, you’ll even consider paying for qualifying medical expenses out of pocket. This way, you request reimbursement whenever you need it but are allowing your investment to grow in the meantime.
You want to save for future health expenses.
We’re facing a crisis with the cost and access to healthcare today, and who knows what tomorrow will hold. An HSA can give you some peace of mind by allowing you to set aside funds specifically for healthcare.
Not only will this help you cover unexpected medical costs, but it can also cover the costs of certain types of insurance premiums, like long-term care, COBRA, and health insurance premiums while unemployed.
You’re seeking tax advantages.
HSA’s offer a unique triple tax advantage:
- Contributions are made with pretax dollars, which can lower your taxable income
- Growth on the account is tax-deferred
- Withdrawals for qualified medical expenses are tax-free
This triple tax advantage is rare, but hopefully, it helps ease the burden of the high deductible that’s required to access the benefit.
You have the discipline to save regularly for high out-of-pocket expenses.
One of the most significant benefits of an HSA is that you can use it to pay for current and future medical expenses. This can help ease the burden of a high deductible or whatever expenses the future holds, but only if you’re disciplined about contributing to the account regularly and leaving the funds invested.
You want to save on health insurance premiums.
While you can’t pay your health insurance premiums with your HSA, high deductible health insurance plans are usually less expensive than options with a lower deductible. This can free up some extra cash flow each month to contribute to your HSA. You can, however, pay the premiums for Medicare using funds from your HSA.
You may even be able to use funds from your HSA to cover the costs of a dental or vision plan that doesn’t qualify for the HSA tax deduction.
You want more investment options.
If you’ve got your eyes on retirement and are optimizing your tax strategy, an HSA will surely pique your interest.
When you have an HSA through your employer, you’re usually limited to the investment options they offer. But if you open an HSA independently, you have broader investment options.
When an HSA May Not be Right for You
Of course, there are also times when an HSA may not be the best option for you. Here are a few instances where that might be the case.
You have a chronic medical condition.
If you or someone in your family has a chronic medical condition, you’re probably going to have higher healthcare costs. In this case, it might make more sense to opt for a health insurance plan with a lower deductible.
You know you’ll need costly care soon.
If you’re facing a serious medical procedure or know that you’ll have high healthcare costs in the near future, it might not make sense to pay those costs out of pocket and wait to be reimbursed from your HSA.
Pros and cons of having an HSA
There are a few key pros and cons to having an HSA that you should consider before making a decision.
Pros:
- No deposit minimum
- Tax benefits
- Easy to transfer
- It can be used for family
- Offset premiums
- Eligible for insurance
- Investment opportunities
- Balance rollover
- Others can contribute
Cons:
- No contributions over age 65
- Limited eligibility – HDHPs
- Tax drawbacks and penalties, if not used properly
- Investment limits
- High deductible requirement
- Limited investment options
How To make the most of your HSA
If you’ve decided an HSA is right for you, here are a few tips to make the most of it.
- Fund it every year
- Pay for medical expenses out of pocket, leaving the funds in the HSA to grow
- Retain receipts for all qualified medical-related expenses
- consider using a cloud-based folder for organization; you can even share it with other family members
- Save the HSA funds for health-related expenses in retirement
Ready to open an HSA? Here’s what to do…
HSAs can be a great way to save for health expenses both in the short term and the long term. If you are eligible for an HSA, it is just the tool to ease tomorrow’s healthcare expenses today.
At Dechtman Wealth Management, we can help you make the most of your HSA. We’ll work with you to make sure your funds are invested and aren’t just sitting there missing out on interest opportunities. We’ll take the time to understand your financial goals and craft a personalized plan to help you reach them. Your complimentary consultation is just a few clicks away.
