Each year thousands of people are faced with the question, “Which insurance plan should I choose?”.
For many of these people, the decision feels incredibly confusing, and they just choose the plan with lowest out of pocket costs. But this may not be the best plan for them, especially if they don’t go to the doctor for more than routine checkups. One of the main benefits of a High Deductible Health Plan (HDHP) is that you are eligible for a Health Savings Account (HSA), which can be a powerful savings tool with benefits that can extend for many years.
What is an HSA?
An HSA is a form of savings account that comes along with a High Deductible Health Plan. It is a specialized savings account offered by your insurance provider that allows you to set money aside to pay for future health expenses. Contributions to this account are not taxed as long as they are used for eligible purchases when they are spent. You are allowed to do this because a HDHP comes along with higher deductibles, as the name would suggest. In theory, if you maximize your HSA contributions, they will drastically reduce, or possibly negate the costs of your higher deductibles.
How is an HSA Different From an FSA?
You are probably thinking, “This sounds a lot like my FSA, what is the difference?” The main difference is that contributions to an HSA are rolled over to the next year if they are not spent. FSA contributions must be used each year, as the contributions are not rolled over into the next year if they are not spent.
What Are The Benefits of an HSA?
There are a few other benefits that come along with having an HSA:
Tax Benefits
The great thing about the HSA is that you contribute pre-tax dollars to the account, much like your employer’s 401k plan. This helps to lower your taxable income, which means you'll owe less in tax (or get a bigger refund) when filing your return. As of 2019, you are allowed to contribute $3,500 per year to an HSA as an individual, and $7,000 as a family. This changes if you are 55 years old or older. The contributions for those age 55 and older are $4,500 and $9,000, respectively. This means that you can save some serious money when tax season comes around. Having up to $9,000 of tax free income is pretty great!
Retirement Benefits
If you have money in your HSA when you turn 65, you can then use your HSA like a Traditional IRA. This means that you can take money out of your HSA, for any reason. The only downside is that because the funds were contributed pre-tax, you will have to pay income taxes on the withdrawals, like a Traditional IRA or 401k.
You Can Invest Your HSA funds
If you build up enough of a balance, currently $2,000, you can even invest your HSA funds in mutual funds or stocks. Naturally, this comes with some risk, so it's something you may only want to consider doing with a portion of your balance. You should keep at least as much as your HDHP out-of-pocket maximum available in cash. But if you start to accumulate more than $10,000, you should consider investing some to improve on the paltry interest most accounts come with.
The Drawbacks
Unfortunately, much like anything in life, HSA’s are not perfect. They do have some pretty great benefits, but there are some drawbacks to HSA’s.
It Must Be Paired With a High Deductible Health Plan
The most prominent drawback of having an HSA is that you need to take on an HDHP. High Deductible Plans are probably not the greatest decision for you, if you find yourself going to the doctor often. Health expenses can add up quickly, so if you go to the doctor often, an alternative health insurance plan would likely be better for you.
Contributions are at Your Discretion
After all, you need to contribute money to your HSA to be able to use it in the future. Another drawback to having an HSA is that you need to elect to contribute to it. If you are not a saver, and you don’t see yourself maximizing your HSA every year, you may want to speak to your employers benefits administrator, to explore other health insurance plans that may be a better fit for you.
Bank Fees Can Add Up
An HSA is similar to a bank account, and it can come with conveniences like paper checks and a debit card to make payments. These accounts can have monthly maintenance fees, which will be deducted from your HSA balance. Be sure to shop around, depending on the balance of your account, you may be eligible to avoid monthly maintenance fees with some banks.
Summary
In a way, opting for an HSA is similar to self-insuring by setting aside money to pay for medical costs when they arise, with some really nice tax benefits and a safety net in the form of an HDHP. If you do decide to make the jump to an HSA, be sure to fund it as aggressively as you can, at least at first. Ideally, your HSA balance should have enough in it to cover the full deductible of your HDHP, so in a worst case scenario, your out-of-pocket cost can be completely covered by your HSA funds.
