Understanding Health Savings Accounts

December 15th 2017 | Clearview Logix Team

A Health Savings Account (HSA) is a financial instrument that allows you to set aside money on a pre-tax basis to pay for certain qualified medical expenses. HSAs were created to supplement High Deductible Health Plans (HDHPs), because HDHPs typically shift the cost of medical care entirely to the insured person until a deductible has been met, at which point the insurance carrier begins heavily subsidizing any future medical expenses. An HSA helps offset those pre-deductible costs by allowing the insured person to use pre-tax money to pay for medical expenses, thus bringing the fully-loaded cost of an HDHP more in-line with other health care plans, whose higher premiums are paid for with pre-tax money.

Anyone can have an HSA, but you can only contribute money to an HSA in the same plan year that you are enrolled in an HDHP, and the amount that you can contribute to an HSA per tax year is capped, pursuant to your age and marital status. An HSA has several notable benefits; it acts as an investment account, and as such can accrue interest and/or other capital gains. HSA contributions are:

  • Tax Deductible: Contributions to HSA are 100% tax deductible, up to the IRS-set limit for each tax year.
  • Tax Free: Withdrawals to pay for qualified expenses are not subject to federal and (in most cases) state income tax.
  • Tax Deferred: Interest or capital earnings in your HSA accumulate tax-deferred, and remain tax-free if used to pay for qualified medical expenses.
  • Yours To Keep: Unlike a Flexible Savings Account (FSA), unused money in the HSA is not forfeited at the end of the year, but simply rolls over. If you don't need HSA funds to cover a current medical expense, you can let the money grow and withdraw it later, even in a future tax year.
  • Portable: The money in your HSA remains available for future qualified medical expenses even if you change health insurance plans, employers, or decide to retire. Funds left in your account continue to grow tax-free.

HSAs are particularly advantageous to those with low utilization of their insurance plan: rather than paying high premiums for a rich plan, a savvy consumer can elect for an HDHP and put their saved premium dollars (often hundreds a month!) towards an HSA every year. After a few years, the HSA balance will be high enough to cover any large medical bills, allowing you to have a pre-tax emergency fund while keeping your recurring premium expenses low. Very high utilizers of health plans also benefit from HSAs. Because they know their medical care will cause them reach their deductible and OOP Max, they can elect for an HDHP, pay less in monthly premium, and simply donate as much as possible to their HSA to help cover their expenses until they hit their Out-of-Pocket Maximum (at which point the insurance carrier will cover all costs).

It can be difficult for people to determine whether an HSA combined with a HDHP is the right fit for their health care coverage. The Health Savings Account can be a potent tool for both managing health care costs and mitigating long-term financial risk. MyClearview considers all of this and more when making plan recommendations, and our HSAdvantage tool helps consumers maximize their HSA savings. We can help you determine which combination of health care products best suits your unique circumstances, while minimizing your total cost.

  • HSAcenter.com
  • Healthcare.gov
  • Investopedia.com

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