It’s hard to argue with the fact that health insurance premiums are on the rise. A recent report from the Kaiser Family Foundation noted employer health insurance premiums climbed 3% last year to $18,764. Further, a quick scan of our state-by-state guide to Obamacare 2018 open enrollment demonstrates the rise of premiums on the healthcare exchanges.
If you find yourself in the crosshairs of a rate increase and are wondering what to do, you should shop around and check other health insurance options during the upcoming open enrollment period. You have between Nov. 1st and Dec. 15th, 2017 to buy coverage for 2018. (And, yes, you can shop the exchanges as an alternative to subpar employer-sponsored health insurance. More Obamacare questions answered here.)
But there’s another way to save on healthcare costs, and this strategy can work regardless of rate increases or whether you buy your own coverage or get coverage through an employer. Provided your health insurance plan meets specific criteria, you may be able to save money with a Health Savings Account (HSA).
How do Health Savings Accounts work?
A HSA is “a type of savings account that allows you to set aside money on a pre-tax basis to pay for qualified medical expenses,” notes Healthcare.gov. Generally speaking, you can only use one of these accounts if you have a High Deductible Health Plan (HDHP). Your deductible is how much money you’re expected to pay before your insurance kicks in. As such, HDHPs tout greater out-of-pocket costs for care in exchange for a lower monthly premium. To be considered an HDHP, your health insurance plan must meet the following minimum guidelines in 2018:
|Individual Coverage||Family Coverage|
|Minimum Annual Deductible||$1,350||$2,700|
|Maximum Deductible & Out-of-Pocket Expenses||$6,650||$13,300|
According to the Internal Revenue Service, no permission or authorization from the IRS is necessary to establish an HSA. Instead, you set up your account with a trustee such as a bank, an insurance company or via a company connected with your health insurance provider.
Once you go through the trouble, the benefits of a HSA extend well beyond just having the ability to save your own money. The biggest perk is, without a doubt, the fact that you can claim a tax deduction for the contributions you or someone else (other than your employer) make to an HSA – even if you don’t itemize your taxes.
And the limits for how much you can contribute are fairly generous. In 2018, the annual HSA contribution limits for individuals with an HDHP will be $3,450, whereas families with an HDHP can contribute up to $6,900.
This money comes off your taxable income directly, effectively reducing the amount of money you owe for the tax year you contribute. That means that, by contributing, you’re saving money on taxes and saving money to fund future healthcare costs.
Other benefits of HSAs include:
- HSA funds are yours, even if you switch employers. The amounts you contribute roll over every year and continue growing whether you use them or not, unlike a Flexible Spending Account (FSA), which you can learn about here.
- Certain HSAs let you invest your funds into investments that can help them beat inflation.
- You can take money out of your HSA tax-free provided you use your distributions for qualified healthcare expenses. If you take money out for non-qualified expenses prior to retirement (more on this in a minute), you’ll face a 20% penalty, plus you’ll pay income tax on the money.
In summary, an HSA doesn’t reduce your health insurance premiums; instead, it offers a way to offset increased costs by gaining savings elsewhere. By opening an HSA to use in conjunction with your HDHP, you can save money on taxes, save for healthcare expenses and grow your funds through investing. And when you need to use your HSA to cover healthcare expenses, you can access the money you need without paying taxes on your contributions or the account's earnings.
Should you use an HSA?
If you have a high deductible health plan (HDHP) already, then it almost always makes sense to save money with a HSA. Your contributions are tax-deductible up to generous annual limits, so you save your effective tax rate on the money you contribute. Plus, you’re building funds you can invest and grow to cover future healthcare costs — which are poised to be even more expensive later on.
Now, if you’re worried (or hopeful) you’ll never use the money you save, that’s not a reason to forgo a HSA. Once you turn 65-years-old, you can take penalty-free distributions from an HSA for any reason – not just healthcare costs. That’s penalty-free, not tax-free. Unless you’re using the money for qualified healthcare, you’ll pay taxes on it. Still, you can use the money to supplement your retirement, use it to pay your Medicare supplement premiums or take a bucket list trip. Note: You can’t continue making contributions to an HSA after you turn 65 unless you choose not to enroll in Medicare.
At the end of the day, there are numerous reasons to open an HSA account and almost no reason not to, if you’re using a HDHP. Now, there are reasons not to use an HDHP. Yes, these plans help keep premiums low, but you’re still facing high out-of-pocket costs before your coverage kicks. And those costs could exceed the money in your HSA, particularly if you’ve just started making contributions. So, at the end of the day, you have to weigh the trade-off between higher premiums and higher out-of-pocket costs to figure out what healthcare plan is best for you.
As you shop for new health insurance this year – or as you continue on in your employer’s plan, make sure to consider the prospect of saving for healthcare in an HSA. While you hope you’ll never face unexpected or excessive medical bills, you can never be too prepared.
Image: Cecilie Arcurs