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Updated Dec. 29, 2018: A high deductible health plan (HDHP) offers much lower monthly premiums than traditional health insurance plans. However, HDHPs require participants to pay for all medical expenses, outside of in-network preventive care, until they meet that high annual deductible. These deductibles range from at least $1,350 for an individual to $6,650 for an individual.
A health savings account (HSA) can help people with HDHPs shoulder those high out-of-pocket costs for medical care. HSAs are tax-advantaged savings accounts that allow HDHP participants to save for future medical expenses. Before you open a HSA to supplement your HDHP, there’s some basic info you need to know. Here’s how to open a HSA.
What is an health savings account (HSA)?
HSAs are savings plans that let you set aside funds for current and future health care expenses. They are only available to individuals and families who participate in a HDHP. HSAs can be used to pay for a wide range of things, including doctor appointments, hospital visits and prescriptions, plus other medical expenses your plan won’t typically cover, like over-the-counter medical supplies.
There are several tax advantages to HSAs:
Contributions to HSAs are 100% tax-deductible.
Withdrawals are tax-free when used to pay for eligible medical expenses.
Interest and investment earnings are tax-deferred and tax-free when used to pay for eligible medical expenses.
The benefits don’t stop there. Unlike flexible spending accounts (FSAs), HSAs aren’t “use it or lose it”. Funds get carried over from year to year and between jobs. Even if you ditch your HDHP for a different insurance plan at some point, you can use previously saved HSA funds for medical expenses tax-free. (Need health insurance? We can help you determing if you qualify for a special enrollment period on the state and federal exchanges.)
“Once funds are in the account you no longer need a HSA-qualified policy to use the funds," said Larry Medcalf, health insurance agent and owner of indyhealthagent.com. "So funds can be used in the future, even if you're no longer covered by a HSA health policy.”
Generally, it’s a good idea to sign up for a HSA if you have a HDHP. If you don’t use all your contributions, you can still save them for future medical costs or even invest them to use in retirement.
Who is eligible for an HSA?
You are eligible for a HSA if you participate in a HDHP and don’t have any disqualifying exceptions. Any individual or family that is solely covered by a HDHP can benefit from the funds available in an HSA.
In any given fiscal year, a HDHP is considered any insurance plan with a deductible that falls within a certain range. The range is set by the Internal Revenue Service. The 2019 guidelines for HDHPs are:
|Individual Coverage||Family Coverage|
|Minimum Annual Deductible||$1,350||$2,700|
|Maximum Deductible & Out-of-Pocket Expenses||$6,750||$13,500|
If your deductible falls within this range, you are generally eligible to participate in a HSA. However, a few exclusions apply that preclude you from opening an account.
You have additional health insurance such as Medicare or a spouse’s health plan (not including dental coverage, vision care or other auxiliary health plans).
You have received U.S. Department of Veterans Affairs or Indian Health Service benefits within the past three months.
You are covered by your or someone else’s FSA.
You are claimed as a dependent on someone else’s tax return.
If any of these exclusions apply, you aren’t eligible to participate in a HSA under current law.
How to choose a HSA
If you find you are eligible for a HSA, the next step is to choose one. Banks, credit unions, insurance companies and other entities can all act as HSA administrators.
Because some insurance companies and employers provide access to their own HSA, you should check with your HDHP provider first. However, you are completely free to compare plans across multiple providers and choose the one that’s best for you. Use some of the following criteria to narrow down your search:
Define your goals for the HSA. You can use your HSA simply to cover the cost of medical expenses for the year. Any money left over can accrue interest. But some HSA plans let you invest your funds in stocks, bonds and other investments to grow your contributions tax-free. Depending on your long-term plans, you may want to choose an investment account to save for future medical costs or even retirement expenses.
Consider convenience. Whether you choose an HSA at a small bank or a large institution, convenience is an important factor. A good HSA will let you easily contribute and withdraw funds the way you want. For example, some HSAs provide debit cards you can use at the pharmacy or doctor’s office.
Evaluate the costs. Make sure to evaluate annual or monthly fees, which differ between banks. Some plans may have different fees depending on your account balance and if you invest your funds. Some HSA providers may also require a minimum balance before you can invest. (Yup, that's right. You can invest the funds in an HSA.)
“It's important to consider annual/monthly fees on these accounts,” Medcalf says. “Also, if you plan on keeping money in the account for long, check to see what type of investment options the bank offers. You don't want your money sitting in an account for years making 0.10%.”
If evaluating different HSA options is too overwhelming, enlist some help.
“If you're having trouble finding an HSA policy call Healthcare.gov or a local health insurance agent,” he says. “Most agents know of the HSA policies offered in their state and can help you find the right one.”
How to sign up for a HSA
You can set up HSAs with banks, credit unions, insurance agents, financial brokers or a company connected with your health insurance provider. How you set up your plan depends on the plan itself.
Most plans can be set up in person, by mail, over the phone or online. You’ll need a form of identification, the details of your HDHP and basic personal information to set up your account. If you’re setting up an investment account, you may need to review investment options at this time.
You should also be prepared to contribute!
Speaking of HSA contributions ...
The Internal Revenue Service limits how much you can contribute to an HSA every year. The 2019 contribution maximums — up slightly from 2018 — are:
|Participants under 55||$3,500||$7,000|
|Participants 55 & over||$4,500||$8,000|
Notice that, if you’re over 55, you get an additional $1,000 as a “catch-up” contribution.
Most HSAs allow you to contribute to your account throughout the course of the year in a number of ways:
Automatic payroll deductions: Set up your HSA contributions to deduct directly from your paycheck.
Automatic bank transfers: Set up your bank account to automatically contribute to your HSA on a recurring basis.
Checks, money orders or bank transfers: Send a check or money order or transfer funds from your bank account whenever you want.
Some employers contribute to their employees’ HSAs, so take advantage of that benefit if it’s available. And remember, anyone can contribute to your HSA: friends, relatives and well-wishers alike.
Lastly, if you have an individual retirement account (IRA), the IRS allows a one-time rollover of funds from your IRA to your HSA up to the maximum annual contribution limit.
If you can afford it, the best strategy is to contribute the maximum allowable amount. Even if you don’t spend all your contributions for the year, you can use them in the future or invest them for long-term growth.
If you can’t meet the max, try to contribute the amount of your deductible each year. That way, you can use the tax-free contributions to cover your out-of-pocket health care costs until your HDHP coverage kicks in.
Although it takes careful planning (and you can’t always anticipate emergencies), you can wait until you need health care or medical supplies and fund your account — so long as you allow enough time for the funds to clear before you visit the doctor or make a purchase.
“One popular account that many of my customers use allows the account holder to transfer money online from their personal account into their HSA,” Medcalf said. “Then they can use the newly deposited HSA money with their debit card, typically within 24 hours.”
Using your HSA
Like all health insurance and finance tools, there are a few wrinkles to HSAs that you need to remember.
Any contributions you make that aren’t deducted from your paycheck aren’t pre-tax, but they are tax-deductible. Using form 1099-SA, you will have to declare those HSA contributions at tax time to get credit for them. Your HSA administrator should provide you with a statement at the end of the year to use for your tax returns. When you file your taxes, eligible contributions will be deducted from your taxable income.
Although you can use your HSA for products and services, such as over-the-counter medical supplies and massages, for example, you may need to get a Letter Of Medical Necessity (LOMN) from a doctor to prove it’s an eligible expense. The list of HSA-eligible expenses is long (see the IRS guide below), so check your HSA plan benefits and determine which expenses may need verification from a doctor. Make sure to save all your receipts, as well.
Once you turn 65, you can still make tax-free withdrawals for eligible medical expenses or you can make penalty-free withdrawals from your HSA for any reason. You still have to pay taxes on the funds, but you can use them to supplement your income, take a trip or buy a hot tub. Note: The ability to use the funds for non-medical expenses at age 65 is why many people use HSAs as a de facto supplemental retirement account.
If you do withdraw your funds for a non-qualifying expense before you turn 65, you will have to pay taxes on the withdrawals and a penalty that is currently set at 10%.
Learn five ways to save more for retirement in five minutes or less.
The IRS has a publication devoted to HSAs and other tax-favored health plans.
The agency also has a comprehensive list of qualified medical expenses, but, again, check with your HSA provider so you know exactly what’s covered and what documentation it might need regarding the withdrawal or purchase.
If you have an FSA, not an HSA, through your employer, Healthcare.gov has a good primer on its basics.
If you are struggling to pay for health insurance or can’t enroll for a new plan until Obamacare open enrollment, we’ve got some short-term health insurance alternatives you can explore.
Need more than just a health insurance plan? Check out our guide to building your own benefits package.