Understanding HSAs
Most people want to save a buck or two when and where they can. That’s a no brainer. What isn’t as crystal clear to many—especially when it’s time to select a health insurance plan—is why one plan offers savings over another. There are low deductible health plans, or LDHP for short, high deductible health plans, often referred to as HDHP and a new approach, $0 deductible health plans.
Understanding the lingo
In health insurance, you have deductibles and premiums. The two go hand-in-hand. A deductible is the amount you are responsible for paying in your health plan before your insurance pays for benefits. Your premium is the amount that comes out of each paycheck to keep your health insurance coverage active.
With most health plans, a HDHP is paired with a lower premium, and a LDHP is paired with a higher premium. Why, though, would anyone want to pay more out of each paycheck? A low deductible health plan might make the most sense for families with young kids who foresee multiple trips to the doctor, people with chronic conditions, or family members that need ongoing treatment. These types of plans can help people plan ahead for anticipated medical expenses.
HDHPs, as defined by the Internal Revenue Service, are plans with a minimum deductible and maximum out-of-pocket limits. With the exception of preventive services, all medical care is paid out of pocket until the deductible is met. There's a tradeoff to high deductible plans. If a routine doctor’s visit leads to the diagnosis of a medical condition that requires costly treatment, you're on the hook for what could be a lot of money in upfront expenses. Learn more about deductibles.
In order to soothe the burn of a high deductible and help people cover the high costs of health care, Health Savings Accounts, or HSAs, were established as law in 2003. To open an HDHP-eligible HSA in 2021, the IRS announced a minimum deductible of $1,400 for yourself or $2,800 for family coverage, with an annual out-of-pocket maximum capped at $7,000 for yourself or $14,000 per family.
What the heck is an HSA?
A Health Savings Account (HSA) is a tax-free savings account for IRS-qualified medical expenses—the only savings account where HSA contributions are deposited tax-free, earn interest tax-free, and can be withdrawn tax-free. As long as the funds are used for legitimate medical expenses, the money isn’t taxed on the way in or on the way out.
To be eligible for an HSA:
- You must have a high deductible health plan.
- You can’t be enrolled in Medicare.
- You can’t be claimed as a dependent on another plan.
What kinds of things can I buy with my HSA?
You can use your HSA to pay for eligible health care expenses, “primarily to alleviate or prevent a physical or mental defect or illness, including dental and vision” according to the IRS. This does not include paying for premiums.
- Doctor’s visits
- Preventive care
- Imaging (MRIs)
- Dentist visits
- Prescriptions
- Physical therapy
- Medical services
- Medical equipment
- Medical supplies
You either use a debit card or submit a claim for reimbursement, but you must prove the withdrawals were used for qualified costs. Because the purpose of an HSA is to save for health care expenses, you’ll face steep penalties if you take out funds for non-medical reasons before you turn 65—a 20% early withdrawal penalty. On top of that, you’ll be taxed on the amount you withdraw.
Can my HSA double as a retirement account?
At first glance, an HSA might look like the superhero of retirement accounts—basically an IRA with the money growing tax-free until you need it. So why wouldn’t it be more popular as a long-term retirement strategy? An HSA, unlike your 401K and IRA, wasn't designed for retirement. With an HSA, your investment options are typically limited to mutual funds or FDIC-insured savings accounts. If you are 65 or older and have maxed out your 401K and IRA, then it might make sense to put extra savings in an HSA.
The percentage of people who actually use their HSA funds for retirement is extremely small. - Shawn Wagoner, Surest Chief Revenue Officer
It’s far more common for people to burn through their balances every year just because the money is there.
What the heck is an FSA?
A Flexible Spending Account, or FSA, is like an HSA in that it’s a financial tool that lets you put money aside—tax-free—for qualified out-of-pocket medical expenses. You have to sign up for an FSA during your employer’s open enrollment period, and it’s up to your employer to determine what FSA expenses your plan will cover.
With most plans, though, common eligible expenses include glasses or contacts, dental work, hearing aids, chiropractic care and many over-the-counter drugs (among a list of other medical products and services). As long as the money is spent on a qualified medical expense covered in your plan, you can contribute and withdraw from your FSA tax-free.
It works like this: If you anticipate spending around $600 every year on vision expenses, for example, you would elect to have that amount deducted from your paychecks over the course of the year. Since the contributions are taken out through payroll (before taxes), it can be a way to save money. And even though the funds gradually come out of your paycheck as the year goes on, the full amount is available right away. It’s easy to access your FSA, too. The total amount is often pre-loaded onto a debit card (or you can pay out-of-pocket and request reimbursement online) to pay for expenses directly.
Unlike HSAs, the funds don’t just roll over from year to year. There’s an IRS-mandated “use it or lose it” requirement at the end of the year. You have a 2.5-month grace period to spend the funds down or you can carry over up to $500 for expenses in the next year (not both). If the rest of the funds aren’t spent, they could go back to your employer.
Paying for childcare can be a huge expense for families. One specific type of FSA account, a Dependent Care FSA, is an employer-sponsored, pre-tax account designed to ease some of this burden. This special account, used only for qualifying childcare-related expenses, can help to reduce taxable income (similar to how a medical expense FSA works, contributions to a dependent care FSA are deducted from your paycheck pre-tax, reducing your taxable income). The current contribution limit is $5,000 per year for each household. If you and your spouse have a Dependent Care FSA through separate employers, the total amount you can contribute is still $5,000.
Opening HSAs to broader use
In order to have an HSA, you have to opt for a high deductible health plan. Not just anyone can open one.
“HSAs in and of themselves are a phenomenal financial instrument,” Wagoner says. “The challenge is that you can only use them with a high deductible health plan.”
Because HSAs are coupled with HDHPs, “You can’t use the savings account to its full potential,” Wagoner says. Why? It takes time to fund an HSA. If paying a high deductible or out-of-pocket maximum is a financial hardship, you’re less likely to have extra money to spare.
A better solution, he says, would be universal use of HSAs, regardless of having an HDHP.
The downside of HDHPs
The catch with HDHPs—and it’s a big one—is that your insurance doesn’t start covering you until you pay a substantial part of the out-of-pocket costs.
Even still, nearly 25% of all companies only offered an HDHP in 2020, according to a survey by the National Business Group on Health.
This puts some people in a tough spot when deciding whether or not to seek care. According to a 2019 Kaiser Family Foundation poll, approximately 50 percent of individuals with high deductibles skipped some sort of health or dental care because they couldn’t afford the out-of-pocket costs.1
Not being able to afford the high deductible can lead people to:
- Put off tests
- Put off treatment
- Ignore or delay follow-up care
- Not take medication as prescribed
- Not get their prescription filled
As reported in the Kaiser Family Foundation poll2, one in eight people said their medical condition got worse as a result of putting off health care or dental care. These decisions can put people's health in danger, and wind up costing more in the long run. (A hospital visit is a lot more expensive than an in-office visit.)
Savings opportunities with $0 deductible health plans
At Surest, we believe people should be able to maximize their health care dollars now, rather than having to meet a high deductible first. As a result, we offer a health plan with a no deductible.
When enrolled in a Surest health plan, you can still spend money in an existing HSA account if you accumulated earnings while on another plan.