Mastering Your Health Savings Account (HSA)

As health insurance costs have risen over the years, many employers have started to offer high-deductible health insurance (HDHA) plans. As of 2020, HDHAs carry a minimum annual deductible of $1,400 for individuals and $2,800 for families, with out-of-pocket maximums of $6,900 for individuals and $13,800 for families.

This means, if you have an HDHA, you could be responsible for hundreds or even thousands of dollars’ worth of medical expenses. So to help with these costs, HDHA coverage includes eligibility for a health savings account, or HSA.

An HSA begins as a cash account that’s funded with pre-tax dollars, earns tax-free interest or investment income, and can be withdrawn tax free to pay for eligible medical expenses. It’s a great way to pay for health care now—and a great way to save for healthcare expenses in years to come.

Most people have HDHAs through their employer, but anyone with an HDHA can open an HSA. Unlike a flexible spending account that has to be must be spent down every year, your HSA balance carries over every year and can keep earning money. As of 2020, individuals can contribute $3,550 per year to an HSA – $7,100 for families – and those at or over age 55 can add another $1,000 annually until they sign up for Medicare. Lots of people fund HSAs through payroll deduction—but however you fund it, the money’s there to use for medical expenses.

Along with HSAs’ role as a way to cover the costs of medical care, these accounts can help you plan ahead for the care you’ll need as you get older. Even a modest monthly HSA contribution can add up to tens of thousands of dollars in 30 years’ time, so it’s never too early to begin contributing.

Seriously: Adults over age 65 worry more about health concerns than about any other aspect of retirement, and many have no idea how much they’ll need for lifelong care. As of 2019, estimates suggest that a healthy couple will need nearly $290,000 for health care throughout retirement, and that sum doesn’t include dental, vision, or long-term care.

So it makes sense to start making HSA contributions decades before retirement; in fact, if you can afford to pay for your routine healthcare expenses without using your HSA funds now, you can build up cushion to pay for medical costs in the future.

Which is not to say you shouldn’t use the funds now if you need them now, for you, your spouse, or your dependent children. In additional, you can use HSA fund to pay back the costs of eligible treatments that occurred after the HSA was established.

HSA funds are portable, which means they don’t disappear if you change jobs or become eligible under a new HDHA health insurance plan. Only people with additional non-HDHA coverage, those on Medicare, and anyone who’s a dependent on someone else’s tax return are ineligible to sign up for HSAs. Enrollment in Medicare puts an end to the ability to contribute to an HSA, but the funds remain available to pay for medical care.

But—in short—not everyone can sign up for an HSA, but if you qualify, the benefits can go a long way toward helping you keeping yourself and your family healthy—now and for years to come. Consult your tax advisor and human resources professionals about whether you qualify for an HSA and how best to use it.