Medical expenses can add up quickly … contact lenses, braces, prescription medicines, supplies for chronic disease care. Thats not accounting for the unforeseen. The broken arm that sends your kiddo to the ER or the emergency appendectomy. Whether youre planning for known or unknown medical expenses, a health savings account that helps cover those costs can be a financial life-saver.
More than 20 million Americans have a health savings account according to a study by Americas Health Insurance Plans (AHIP). This number continues to rise with the popularity of high-deductible health plans (HDHP). The reason is simple. If you hold an HDHP, you could pay thousands of dollars in medical expenses before your insurance kicks in. A health savings account provides a powerful tool to save for these expenses.
When determining if an HSA is right for you, consider the answers to these commonly asked questions.
What is a Health Savings Account?
A health savings account, commonly referred to as an HSA, is a type of savings account used alongside a high-deductible health plan. The HSA allows you to save money tax-free to cover medical expenses not covered by your health insurance.
According to the IRS, in 2018, an HDHP must have a minimum annual deductible of $1,350 for individuals or $2,700 for families. The annual out-of-pocket expenses (deductibles, co-pays, etc.) cannot exceed $6,650 for individuals or $13,300 for families.
This can pose a large financial burden for many, making an HSA an attractive option to cover costs. For example, if youre a family of four whose health insurance plan includes a $3,000 deductible, funds contributed to your HSA account can be used to cover qualifying medical bills before the deductible is met. This saves you from finding the money elsewhere in your budget or taking on debt to cover the costs.
By earmarking funds in advance, you protect yourself from financial hardship. An added benefit, money added to your HSA comes with a triple tax benefit. It is tax-deductible when contributed, grows tax-deferred and is tax-fee when used to pay for qualifying expenses. So by using an HSA, you can save money on the cost of medical goods and services.
Who Qualifies for an HSA?
Federal guidelines state that to open and contribute to an HSA you:
- Must have coverage under an HDHP on the first day of the month
- Cannot be covered by any other non-HDHP plan (with some exceptions)
- Cannot be enrolled in Medicare
- Are not claimed as a dependent on someone else’s tax return
In addition to these guidelines, ensure your HDHP is HSA-eligible. For example, SHRM states if your HDHP provides coverage for prescription drugs, office visits or emergencies before you meet your deductible, your plan is not HSA-eligible.
How Do I Contribute to an HSA?
You can open and contribute to an HSA in one of two ways. If your employer offers an HSA, you can open and fund your account through your employer’s chosen plan. Should you ever leave your current job, your HSA, much like your 401(k), is yours and can be transferred to another custodian if you prefer.
If you do not have an employer-sponsored HSA, including if you are unemployed or self-employed, you can open an HSA at your chosen financial institution, as long as you qualify.
How Much Can I Contribute to My HSA?
The government limits the amount you can contribute to your HSA each year. For 2018, singles may contribute up to $3,450. Families can add up to $6,900 to their HSAs. For those 55 and older, you may contribute an extra $1,000 per person as a catch-up contribution.
What Qualifies as a Medical Expense?
The IRS provides a detailed list of qualified medical expenses. Use the most current version of this list to gain the maximum benefit allowed. Some covered expenses for your 2017 tax return, include:
- Dental treatment
- Eye exam, contact lenses and eyeglasses
- Fertility enhancement
- Hearing aids
What is the Difference Between an HSA and an FSA?
- Unlike an FSA where you must use all the funds contributed to the account in a given year, an HSA allows you to roll over unused funds to the next year. If your medical expenses are less than anticipated one year, using an HSA, you can carry over the remaining funds to cover next years costs or even save for healthcare in retirement.
- An HSA offers greater flexibility to change your elected contribution throughout the year. With an HSA you can change the amount of money you contribute at any time. Since an FSA is provided through an employer, the elected contribution is fixed and can only be changed during open enrollment or in the event of a change to your employment or family status.
Healthcare is a necessary part of life. Whether you are planning for known medical costs or emergency situations, consider the benefits of opening an HSA and decide if it is right for you and your family. You may find this savings vehicle provides peace-of-mind and added financial security when qualifying medical expenses befall your family.