Decoding the Concept of Health Savings Accounts

 

I have already covered multiple types of accounts and other benefit-related concepts, such as HRAs, HSAs, and FSAs, the accounts with three confusing acronyms that few know what they stand for. Now, I’ll shed some light on your options which will be the last in the series. 

I will also aim to make this blog an ongoing resource to consult whenever you need clarification on the different resources available, and I hope it will serve as underlying support when making important decisions for your future.

Keep in mind: Most of the time, you can’t use these types of accounts in conjunction with one another, so it is essential to understand the pros and cons of each account type. 

Let’s get started. For this last article, I hope to discuss other accounts that end in ‘SA.’ These are not the same as those mentioned in previous articles—these are the almighty HSA’s! The HSA’s are, by far, my personal favorites, but I might be biased due to my current healthcare status (utilization of accounts or lack thereof). 

You probably remember what I mentioned in previous Spending Account articles—SA’s come in various presentations and can cover different things, including aspects not strictly health-related. Health Savings Accounts (the other types of SA’s) operate very differently than Spending Accounts and are intended for long-term savings. These help the account owner put money aside on a pre-tax basis when making deductions through payroll or if making deductions outside payroll—on a tax-preferred basis. In the latter, you’d be depositing funds into your account throughout the year. You would then lower your taxable income based on the amount deposited on your (personal) tax return. This would, of course, be subject to the appropriate IRS-allowed maximums for the year.

Many think of HSA’s as a Healthcare 401k. If you have the mindset of saving money, this is an intelligent way to conceptualize it. You put money aside for a rainy day, so to speak. You don’t pay taxes on these dollars, earn whatever interest the bank is paying you, and, eventually, you can use these untaxed assets on healthcare expenses.

Here are a couple of things worth knowing about Health Savings Accounts. Going forward, I’ll be referring to these specifically as HSA’s.

  • The banking side of HSA’s is easy to understand. 
  • You can open an HSA with any eligible financial institution.

An HSA is a bank account and operates similarly to a basic checking account. Like a checking account, you must have money available before spending it. Most HSAs come with a debit card or checkbook for you to access your funds. The IRS regulates the proper use of the funds, but as long as you use your money for healthcare, dental care, vision expenses, or similar, you never have to worry about paying tax on your account funds.

The unique thing about these accounts is that you must be enrolled in a specific type of health plan—a high deductible health plan sometimes referred to as an HDHP (I know, more acronyms) that is considered HSA eligible. Plans like these are not allowed to have any first dollar benefits (no co-pays) until after the deductible (the HD) has been met. These deductibles can be very high.

Some plans nowadays have co-pays that kick in after the deductible, while others act more like a home or auto policy where you pay your deductible and then you’re done. Many have 100% coverage after the deductible, whereas some will have an 80/20 split in any remaining bills. However, for the most part, this depends on the plans made available to you by your insurance provider. 

If you need help with these, please let us know. We are used to translating insurance jargon into understandable English.  

Similar to what we did with the spending accounts, we want to lay out some high-level specifics related to the HSA’s. Here we go!

What are the eligible purchases and spendings?

Eligible health, dental, vision & pharmacy expenses (IRS-regulated) are included.

Upfront payments

Don’t forget that an HSA works like a regular bank account. If you haven’t put money in the account, there’s nothing for you to spend or save.

What are the maximum contributions allowed?

  • Individual – $3650 (2022); $3850 (2023)
  • Family – $7300 (2022); $7750 (2023)
  • Catch Up Contributions also allowed

Are there tax benefits?

Yes, you can set up and remove benefits from employees’ paychecks on a pre-tax basis. This means the expenses get paid with pre-tax dollars or, if deposited after tax, the account holder will have their taxable income adjusted at the end of the year.

If an employer makes deposits, these are commonly treated as a business expense by the company/business owner.

Who is it funded by?  

Most commonly, anyone can put money into the account on the account holder’s behalf, but the account holder is the one that gets the tax benefits.

What are the “gotchas”? There are three:

  • Warning: A Health Savings Account (HSA) cannot be used alongside an FSA.
    • If both are available, take the Savings (HSA) route. First, make sure you are okay with the corresponding medical plan. You can keep the funds long-term in the savings environment, but your health plan might be somewhat lacking.
  • Unlike FSA’s, these accounts are not “use it or lose it.” 

Max out the deposits if you can, and save, save!  

  • Many banks will also allow you to invest these funds into the stock market once you’ve reached a certain balance. So, you can earn and grow the account tax-free if going this route while investing wisely.  
  • Like with FSA’s, you are only eligible to pay claims out of an HSA after it has been set up. So start by opening the account and putting some money in there. You can adjust your deposits throughout the year, but you want to get the account active before spending the funds.  

Let me demonstrate with a personal story. My wife and I have been on HSA-eligible plans for many years, and we max them out each year. While we occasionally dip into the funds some years, there are other years when the money goes completely untouched. We just continue to build our savings. Unfortunately, most of us end up in the hospital at some point in life, and for us, this is the ideal way to save up for future needs and to help save for retirement. Once you hit retirement age, the rules change a bit, and you can do a lot more with the HSA balance, but we’ll save that for another article.

We are yet to mention another benefit that could help free up some cash for your HSA deposits—HSA correspondent health plans! These tend to be more affordable than traditional co-pay plans since they don’t have built-in co-pay.

What a lot of people do is cut their premiums a good amount by making the switch. Then, they deposit the difference (which they’d typically spend anyway) into the savings account. The difference here is you are paying yourself and not the insurance company, which, for most, equals is a welcomed change.

We hope this information has been helpful and provided some industry insight into these types of accounts and why we personally like them. Admittedly, they are not for everyone, but nothing ever is. This is just another arrow in the quiver of our vast employee benefits world that, when used properly by people with the right mindsets, can make a real difference.

Thanks for the read! Stay tuned for more health and benefits-related information in the future and as always, please contact us if you have any questions!

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