A health savings account (HSA) refers to a savings account that enables you to have money set aside for qualified medical expenses. It is of the same similitude as individual savings accounts. However, the difference is, an HSA is solely for medical purposes.
The money deposited in your HSA account is not taxed. Also, an HSA account ensures you can have an overall reduced health cost when you pay for, coinsurance, co-payments, and deductibles.
How Does a Health Savings Account Work?
To use an HSA account, you need to pay tax-free deposits to your account every year. These deposits can be withdrawn by you to take care of medical expenses at any time you wish. The medical expenses could either be personal, that of a spouse or any family member.
At the end of each year, funds not used are brought forward to the next year so your account continues to grow. An HSA account can be used for non-medical purposes If need be, this just makes your withdrawals taxable with a 20% penalty. Otherwise, it remains tax-free.
However, if a person is disabled at any age, or is 65 years, there’ll be no more penalties for withdrawing HSA funds for non-medical purposes. Let’s look a bit further into those who are eligible for HSA accounts.
Who Is Eligible for an HSA?
Not just anyone is eligible for an HSA. Under U.S law, there are stringent requirements that must be met before becoming eligible. Some of these requirements are:
- One must be registered under a High Deductible Health Plan (HDHP) on the first day of the month.
- Must be 18 years and above.
- One must not have another health plan (although there are exceptions to this).
- You must not be enrolled in Medicare.
- You must have your tax return and not depend on other people’s own.
- If you receive hospital care under any law administered by the Secretary of Veterans Affairs. Service-connected for disabilities.
If these requirements are met, then you become eligible for HSA. Whether your spouse has HDHP family coverage or not, provided it doesn’t cover you, then you’re fine. Anyone who is eligible and wants an HSA must have their account as joint accounts are not permitted not even with your spouse.
Who Funds an HSA?
You get to fund your HSA account. If you’re an employee, funding your HSA account can be done by you and your employer. However, the Internal Revenue Service placed a limit on the joint amount you, your employer, or any other person can contribute annually.
Funding your HSA account could be done by deductions, transfers, or your income.
Can Anybody Get an HSA?
Not just anybody can get an HSA. As stated earlier, you can only obtain an HSA if you are eligible and meet the requirements. Also, as an employee, you can open an account yourself even if your employer doesn’t open any for you.
However, for the older ones, a few changes could be made to the requirements to suit them.
Is There a Limit to How Much I Can Contribute?
Yes, there is. Unlike your regular savings account, there is a limit to how much you get to pay into your HSA account. As of 2020, there was an increase by the IRS in the contribution for HSA accounts.
- Individual coverage — $3,550
- Family coverage — $7,100
- For a “catch-up” contribution if you’re 55 years and above — $1,000
These limitations are annual. If there’s an excess deposit, a 6% tax will be attracted on the increment.
What Is a Health Reimbursement Account (HRA)?
A Health Reimbursement Account or Arrangement (HRA) are tax-advantaged accounts sponsored by employers used to reimburse employees. This reimbursement could either be for co-payments, deductibles, prescription drug costs, and other qualified medical and dental expenses.
In most cases, HRAs are offered as joint packages with high-deductible health plans. However, the employer’s contributions to HRAs for qualified medical expenses are free from federal income and payroll taxes. Any HRA funds that are not used up by the end of the year can be rolled over indefinitely.
Although, it is within the power of employers to limit the aggregate carryover amount. Now, this is in contrast to HSA account funds which may never be used for expenses not stated in the plan. And as such, employees may lose their unused balances when they separate from their employers.
The major difference between HRAs and other accounts like HSAs, and health flexible spending accounts is that only an employer can contribute to the accounts.
What Is a Flexible Spending Account (FSA)?
A Flexible Spending Account or arrangement (FSA) is an account used to pay for certain out-of-pocket health care costs. Taxes are not paid on this account. The FSA account has a “use it or lose it” policy which may be a disadvantage for employees.
However, in 2020, an optional plan amendment was made by the Internal Revenue Service allowing participants to carry over up to $550 or less into the following year. Otherwise, if you do not use up your funds by the end of the year, they will be relinquished to your employer. And so, employers don’t need to make contributions to your FSA, but they can if they wish to.
This is in contrast to the HSA account, which is transferable and allows you to grow your account annually. This is yours to save just like your personal savings account.
Benefits & Disadvantages of HSA’s
Everything as we know it has its advantages and disadvantages and HSAs are not left out. Let’s take a look at what they are:
Benefits of HSA’s
HSAs are presented with several benefits that not only secure your money but also provide you with a way out during medical/health emergencies. Some of these benefits are:
Autonomy Power: When it comes to your HSA account, you have a complete say as to how your funds are spent. Whatever amount you choose to set aside for your health care depends on you. Also, you get to choose what kind of health care services you want based on quality and cost.
Rollover Funds: Although your employer can contribute to your HSA, you still own the account. Even if you become separated from your employer, the money is yours still. And so, whatever money left by the end of the year rolls over (stays in your account) to the next year and is yours indefinitely.
Tax-Free: Whatever money that goes into your HSA account is free from tax. This means that you’re not charged extra for these funds. You may also make extra money kept in your HSA account. This is possible because some HSAs pay interest on the unused money in your account or invest the money in mutual funds or other financial products. The earnings from an HSA are also tax-free.
Payment Flexibility: With an HSA account, you have a flexible payment plan. It ranges from how payments are made to your account, who does this payment, and when these payments can be done.
Movable Account: One good thing with an HSA account is that it remains yours regardless of whatever may happen. Even if you change jobs, all you may need to do is register with a new health care plan and you’ll still have access to your existing account.
Disadvantages of HSA’s
Account Limitations: Unlike your regular account, HSA has limitations on how much of your money you can save up for health care.
Limited Finance: As there is a limitation to how much you can save up, it’s also possible that not everyone may be able to meet up with the budget for HSAs. And so, it may become challenging to make consistent funding plans for your HSA.
Penalty: If you take money out of your HSA for non-medical expenses, you’ll have to pay taxes on it and you’ll be charged 20%penalty.
High Deductible Health Plan: With an HDHP, you get to pay more out-of-pocket money before your insurance can commence. This makes the upfront quite high and unaffordable for some.
What Happens to My HSA If I Leave My Job?
Regardless of what happens to your job, the funds in your HSA account still exist for you. However, nominal bank fees may apply if your enrollment is no longer connected to your employer.
What If I Don’t Use All of My HSA Funds by the End of the Year?
Nothing happens if you don’t use up your HSA funds by the end of the year. It is rolled over into the following year. Whatever money you may have saved up in your HSA account is yours for as long as you have it.
Taking Advantage of Your Health Savings Benefits
An HSA account is such an amazing way of having an ideal health insurance plan. Although, there are lots of advantages that make it very profitable and a few disadvantages that may hinder you from getting the best.
You should not be discouraged as there’s something for everyone interested in having an HSA. On this note, consulting a financial advisor may be your best bet as they’ll walk you through the plans of HSA and how to get a budget that sits well with you.