Healthcare and medical expenses can add up rather quickly, which means it’s essential to be financially prepared — which can be done by opening a health savings account (HSA).
An HSA is a type of savings account that holds pre-taxed money. The money saved in an HSA can be used to cover current or future medical expenses as determined by the provider.
Learning how an HSA works is important for your physical and financial health.
What Is an HSA & How Does It Work?
An HSA can be thought of as a kind of emergency fund. Except, where an emergency fund can be used to pay for any type of expense, an HSA is exclusively used for healthcare or medical-related expenses.
This type of account is similar to a traditional individual retirement account (IRA), in that the contributions made are not taxed.
But unlike a traditional IRA, withdrawals from an HSA that are put towards qualified medical expenses can remain tax-free.
Combined with the fact that the interest earned on an HSA is also tax-free, paying medical bills through an HSA can help to save a significant amount in the long term.
Although the medical expenses that can be covered by an HSA may differ depending on the type, the Internal Revenue Service (IRS) mandates all HSAs help cover a range of healthcare treatments, services, and supplies, such as:
- Diagnostic Services: This can include medical tests or examinations used to detect a health issue.
- Preventative Treatments: Included in this category are treatments like immunizations and mammograms.
- Optometry: Eyeglasses, surgery, and eye exams are eligible for coverage.
- Dental Treatment: Dentures, cleanings, and routine dental work are considered qualifiable.
- Medical Equipment: Many types of medical necessities such as hearing aids, prosthetic limbs, wheelchairs, walkers, and crutches can be covered.
- Medicine: Qualifiable medication includes over-the-counter (OTC) and prescription drugs.
Who is Eligible to Open an HSA?
HSAs can be employer-sponsored or opened independently by an individual through their financial institution.
Eligibility to open an HSA is determined by two factors — the individual’s age and type of health insurance plan.
Only those who are enrolled in a high-deductible health insurance plan and are under the age of 65 are eligible to open an HSA.
A deductible is the amount of medical expenses the insured must pay each year before coverage can be applied or used.
The deductibles for any plan are dependent on the insurance company, but most high-deductible plans for individuals typically don’t start paying for coverage until the insured has spent at least $1,400 of their own money on medical or healthcare expenses.
The maximum deductible amount for individuals under a high deductible plan is typically $7,000.
For families, the minimum deductible amount is generally $2,800, with a maximum of $14,000.
Regardless if the high-deductible plan is employer-sponsored or has been opened by the insured through their own financial institution, married couples can’t jointly own an HSA, even if one spouse is listed as a dependent on their partner’s insurance. Each spouse must open their own account.
And while withdrawals from one partner’s account can be used to help pay the medical expenses of the other, funds can’t be directly transferred between accounts. With an HSA, there can only be one owner.
Benefits of HSAs & High-Deductible Health Insurance Plans
While the amount spent on deductibles under a high-deductible insurance plan may be steep, it’s normally offset by the money saved on premiums or the monthly fee one must pay to obtain coverage.
The premiums attached to high-deductible insurance plans can be up to 50% lower than those of traditional health insurance plans.
The money saved on premiums under a high-deductible insurance plan can go back into one’s HSA.
And since all unspent funds held in an HSA can be rolled over into the next year, the account holder doesn’t have to worry about losing money.
This even extends to the funds and contributions made in an employer-sponsored HSA, as it can all be moved to a new account should the owner change jobs.
There is no “use it or lose it” stipulation with an HSA as there is with other types of accounts, such as flexible spending accounts (FSAs). Account holders are required to use the money in the FSA prior to the end of the calendar year, or they risk losing any money in the account.
Those who qualify should take advantage of opening an HSA, rather than an FSA.
How Can You Contribute or Withdraw From an HSA?
As is the case with retirement accounts, contribution limitations and withdrawal restrictions are set by the IRS.
Contributing to an HSA: Employee-Sponsored & Individually Owned
According to the IRS, individuals can’t contribute more than $3,600 per year into their HSAs. For families, the annual contribution limit is doubled to $7,200.
In an employer-sponsored HSA, the employer can match or contribute to an employee’s HSA, but the total of both the employer’s and employee’s contributions can’t exceed the limits set by the IRS.
The IRS does, however, make exceptions for account holders between the ages of 55 and 65.
As they are nearing retirement age, such individuals can “catch up” by contributing up to $1,000 over the regular annual limit.
Once an account holder reaches 65 years-of-age or enrolls in Medicare, they can no longer make contributions to their HSA.
Withdrawing From an HSA
Since the purpose of an HSA is to help pay for healthcare and health-related expenses, the IRS does subject early withdrawals for non-medical expenses to both federal income tax and a 20% penalty.
Individuals who are at least 65 years old can withdraw from their HSA for non-medical purposes without being penalized, although the money can still be taxed.
So, an HSA can also serve as a retirement account of sorts.
Much like how funds in a retirement account can compound or accumulate more interest over time, unspent dollars in an HSA account can earn untaxed interest for every year the account remains active.
Save Smart with HRCCU
Putting all your eggs in one basket can be risky. By allocating savings in different types of accounts — like an HSA, you can help keep yourself financially secure even in the wake of unexpected expenses.
HRCCU members have a plethora of low-maintenance savings accounts to choose from, making it easier to protect your financial stability.
Whether you’re looking to build an emergency fund, invest in healthcare, or save for retirement, we offer competitive interest rates and options aimed at helping members reach their personal financial goals.
Finance your current lifestyle and future with the products and services offered by the advisors at HRCCU. Contact us today to learn how to make the most of your savings.
