Everything You Need to Know About Health Savings Accounts (HSAs)
A Health Savings Account (HSA) is a special kind of savings account for those who have a High Deductible Health Plan (HDHP). Using this account, you can contribute pre-tax dollars to be used for qualified medical expenses.
So what does this actually mean? Because you can put pre-tax dollars into an HSA, depending on how much healthcare you use in a year, you may be able to save on your total healthcare costs because you can pay those expenses with tax-free money.
Keep reading to learn more about how HSAs work, what they can be used for, how you get reimbursed for your expenses, and more.
How does an HSA work?
The first step to using an HSA is to enroll in a HDHP, and after your enrollment, you’ll be able to get an HSA account. These kinds of plans — some of which are available on the Marketplace — typically only cover preventive care before your annual deductible is met. This means the costs for all your health care that isn’t preventive (preventive care includes things like annual wellness check-ups and vaccinations) will be paid in full out-of-pocket up until you’ve met your deductible. Depending on how much healthcare you access in a year, this can add up fast.
You can enroll in an HDHP at HealthCare.gov or at HealthSherpa—enter your zip code below to see plans and prices:
The tax advantages associated with an HSA mean you can save up to 37% on your health care costs, depending on which tax bracket you are in.
In 2020, the minimum deductible for an HDHP was $1400 for an individual and $2800 for a family. Those with these plans could also contribute up to the HSA contribution limit of $3500 for only themselves or up to $7100 for their family into an HSA. Pretty much any healthcare cost other than monthly insurance premiums is HSA-eligible, including copayments/copays, coinsurance, dental expenses, costs of prescriptions, and even things like bandages, tampons, and contacts.
HSA funds also roll over year to year if you don’t spend your full contribution, meaning that your HSA balance will still be available for your medical costs the next year and remains nontaxable.
What is an HDHP plan?
To understand how HSAs work, you’ll also need to understand how HDHP plans work. An HDHP plan is a health insurance plan with a higher deductible than a traditional health plan. These plans typically have lower monthly premiums, but policy holders must pay for their healthcare expenses out-of-pocket before meeting their annual deductible. Only after your deductible has been met will your insurance company begin to pay out on your plan.
Because of the high out-of-pocket costs associated with HDHPs, they can also be combined with HSAs to allow for pre-tax dollars to be set aside to help defer these out-of-pocket costs.
How to get reimbursed for your health care expenses from your HSA?
There are a number of different ways to get reimbursed for your healthcare expenses through your HSA. The most important thing to keep in mind is that you can only seek reimbursement for expenses incurred after your HSA was established.
Broadly, you can either pay for your qualified expenses directly from your HSA or out-of-pocket and then reimbursing yourself through your HSA.
To pay for expenses directly from your HSA, you can do so from either an HSA debit card you will be issued or checks tied to your HSA account you can order upon establishment of your HSA. Many HSAs also have online bill pay options, allowing for bills to be paid from your HSA bank account online to your providers.
If you want to reimburse yourself at a later date from your HSA for expenses you paid out-of-pocket, you again have a few choices. The first step, no matter what, will be requesting reimbursement though your HSA administrator. Depending on your administrator, the next steps may differ but typically don’t involve a need for excessive documentation of expenses incurred. Reimbursements are most commonly made through either an HSA debit card, a check written from your HSA account to your own checking or savings account, or through an online transfer from your HSA account to your own personal accounts.
Be sure to keep a record of all of your healthcare expenses, including all bills and receipts, as you will need to report these amounts, and your total HSA withdrawals, to the IRS each year when you file your taxes.
Also important to know: If you use your HSA to pay for any non-qualified expenses, a 20% penalty fee will be applied and you’ll also be responsible for income tax on that amount. Those over the age of 65 can withdraw money from their HSA for non-qualified expenses without the penalty fee, but will still have to pay taxes on that income.
How do HSAs differ from FSAs and HRAs?
Both FSA (flexible spending accounts) and HSAs allow people to use pretax income for medical expenses, there are some large differences between the two. HSAs are only available to people with a high-deductible health plan. FSAs are set up and technically owned by an employer, and you cannot carry them with you after a job change.
HRAs (health reimbursement arrangements) are a different kind of health insurance fund that are employer-owned and employer-funded. Employers must set up HRAs, and employers fund the HRAs and get the tax advantages.
What are all of my health insurance options?
- Marketplace/Obamacare plan. You can enroll in a Marketplace health insurance plan, also known as Obamacare or Affordable Care Act insurance. See plans and prices here.
- Medicaid. You also may be eligible for Medicaid, depending on your income. You can see if you’re eligible and apply here.
- COBRA. If you’ve been laid off recently, you usually have the option of COBRA, where you pay the full premium of the same insurance your employer purchased for you. COBRA is typically much more expensive than Marketplace insurance, but it allows you to continue the coverage you already had. Learn more about comparing COBRA with Obamacare health insurance.
- Medicare. Once you turn 65, you’re eligible for Medicare. Call us to enroll at (855) 677-3060.