If you’re trying to choose a health insurance plan, you might have seen an HSA option offered by your employer as one of the cheaper plans. In this article, were going to talk about what are the pros & cons of choosing a Health Savings Account compatible health plan.
Where did Health Saving Accounts come from?
Back in in 2003 the United States Congress was looking for a way to encourage people to enroll in health insurance. Especially people who didn’t currently need medical treatment, who would then wait until they needed medical treatment before they tried to get health insurance.
Many people felt that insurance was too expensive and not worth it. In order to have a low-cost insurance plan, you need to design a health plan with a high deductible.
Welcome High Deductible Health Plans (HDHP)!
The IRS then created a special tax advantage to encourage individuals to save money for their future medical expenses.
Who should choose an HSA compatible plan?
The main benefit to enrolling in an HSA compatible plan is the lower monthly insurance premium compared to other plan options available. If you want the cheapest plan, the HSA plan is usually the least expensive option!
I usually recommend an HSA compatible plan to those people who:
- Don’t usually, or never, see a doctor throughout the year.
- Want coverage is case something major happens.
- Primarily use doctors who don’t take insurance.
Pros of Choosing a High Deductible Health Plan with an HSA
Lower Monthly Cost
The biggest benefit of choosing this type of plan is the low premium cost. If you are looking for the least expensive plan, the plans with a higher deductible are usually going to be your cheapest option.
In order for a health insurance plan to meet the requirements as “HSA Compatible” put in place by the IRS, it needs to have a minimum deductible.
2020 Minimum Deductible = Individual: $1,400 | Family: $2,800
2021 Minimum Deductible = Individual: $1,400 | Family: $2,800
How to Open a Health Savings Account
Once you enroll in an HSA compatible health plan, you will be allowed to open a Health Savings Account.
An HSA is just like your standard checking account from your bank. You can open an HSA at most banks, like Bank of America. You can even open an HSA through Fidelity or Vanguard.
I prefer to use HSAbank.com, since they specialize in only Health Savings Accounts and they have the lowest monthly fee I’ve found of only $2.50 per month.
The Tax Advantage of an HSA
The tax benefit is very simple. Each year you are allowed to put a certain amount of money into your HSA. Anytime you deposit money into your HSA, it is a tax-deductible expense. Just like a traditional IRA.
For 2020, you can contribute up to $3,550 if you’re on the only one on your health insurance.
For 2020, you can contribute up to $7,100 if you are on a ‘Family’ plan. A family plan is yourself with at least one other person.
If you are 55 years old or older, you are allowed to contribute an additional $1,000 per year to your HSA.
You would receive this tax deduction even if you don’t itemize your tax deductions.
Managing Your HSA
No “Use it or Lose it” Feature
Unlikea Flexible Spending Account (FSA) you don’t need to spend all the money in your HSA each year. The money in your account would be available for you to use for qualified medical expenses forever.
Investing Your HSA Balance
Your bank will allow you to invest the funds in your HSA into different investment portfolios.
Different banks have different minimum amounts to be invested. For example, HSABank requires you to have at least $1,000 in the account before you can invest. You would be allowed to invest the balance over $1,000.
In general, the funds will grow tax-free! You can then use the funds for all medical expenses.
How to Pay for Eligible Medical Expense
The simple way to pay for medical expenses is to use the debit card that comes with your HSA. You must have the appropriate funds deposited in your HSA to pay for those expenses.
However, if you don’t have your HSA debit card handy, or want to use your credit card to get points, you can still get the tax advantage of your HSA. After paying for an eligible medical expense with something other than your HSA, you would later withdraw money to pay yourself back for that eligible medical expense.
You must have your Health Savings Account open and active with a balance at the time of treatment or at the time of purchasing your over-the-counter eligible expenses.
The HSA ‘Filter’ Technique
If you only want to contribute to your HSA the amount you spent on actual medical expenses for the year, I recommend using what I call the ‘Filter Technique’.
After opening your HSA, you must deposit a small amount of money to ensure your account is active and open. Even if that amount is $50, that is okay as long as something is in the account to keep it open.
Keep track of all medical expenses for yourself and your family throughout the year. In this scenario you would use a different funding source besides your HSA, such as your credit card, checking account, etc.
Tally up the total amount you’ve spent and deposit that amount into your HSA. Once that amount is deposited, you would receive that tax deduction for that deposit.
The final step is to immediately withdraw those funds, paying yourself back for the expenses you’ve already had throughout the year. This method ensures that you get the maximum deduction for our actual medical expenses spent that year.
What Can I Use My HSA Funds to Pay For?
You are allowed to pay for:
- Medical Expenses
- Cosmetic expenses would not be allowed, except in a situation where it was medically necessary. These cases would include a birth defect, a personal injury, or a disease that resulted in disfiguring. You might need to get a letter from your doctor attesting that your procedure is medically necessary.
- Dental Expenses
- Chiropractic Expenses
- Prescription Drugs
- Feminine Hygiene Products
- This is a newly eligible expense starting in 2020.
- Vision Expenses – Such as exams, contacts and glasses
- Over the Counter Medications
- General health daily vitamins and supplements are excluded. The item you are purchasing must be used to treat a specific illness or disease or medical condition.
To see a complete list of the IRS guidelines, click here.
It is also very important to remember, you can use your HSA funds for your dependents, even if they aren’t on your health insurance plan!
The specific definition of an eligible dependent is anyone who could be listed as a dependent on your tax return. That means your spouse, daughter, son, step-child, etc.
If you have an adult child on your HSA qualified health insurance plan, but they file their own taxes, they would need to open their own HSA. Their account could only be used for themselves and their qualified dependents.
What are the Cons to Enrolling in an HSA?
The main downside to having an HSA compatible health insurance plan is the plans actual benefits.
These plans must have a higher than normal deductible.
You don’t have traditional co-pays for doctor visits, urgent care, emergency room, or prescription drugs. The IRS requires that HSA compatible plans have no upfront benefits before your deductible.
The only exception to this is your annual checkup, which is still covered at no cost for almost all health insurance plans.
If you are currently getting treatment, have planned treatment in the near future, or need prescription drugs, it is important to understand what costs you will have up front before your deductible and the insurance company start paying for your expenses.
If you have immediate medical expenses, it may or may not be beneficial to choose an HSA compatible plan. It is important to calculate the monthly premium savings and your expenses against your other plan options.
Employer Contributions & Premium Assistance
If your company is paying for a portion of your health insurance plan, or you are receiving a tax subsidy from the government you may want to choose a health insurance option with better benefits.
Depending on the amount you are receiving, the savings you would get from enrolling in a cheaper plan may not be worth it. It is important to evaluate what the best plan is based on what you would pay after any contributions from your employer or tax-subsidy.