I have never heard anyone say, “I hate that I saved all that money.”
The more I live, the more I realize saving money is one of the wisest decisions I can make.
Saved money gives you options.
Options give you freedom and freedom gives you peace.
If there is ever a time to have options, it’s when your health (or someone you love) is challenged. That’s the perfect time to have good health insurance and even more important to have a Health Savings Account, or HSA.
When first introduced to HSAs at work, I was reluctant. Why pay for insurance and a savings account? Was it only about reducing my take-home pay or was there more to this that I just didn’t understand?
HSA History & Why They Were Needed
HSAs were created in 2003 so that individuals covered by high-deductible health plans could receive tax-preferred treatment for any money saved for medical expenses.
Tax-preferred is a good word and usually means “to save money”. Let’s now focus on a high deductible health plan (HDHP).
HDHPs are different than traditional insurance plans. They offer a much lower monthly premium (i.e., the monthly cost for insurance) and have a higher deductible (i.e., the total you pay before the insurance coverage begins).
HDHPs have a maximum annual deductible and out-of-pocket medical expenses that you must pay for covered expenses.
By design, most HDHPs have a safe harbor which provides full coverage for preventive care benefits without requiring you to meet the annual deductible. This includes:
- routine health screenings such as annual physicals
- routine prenatal and well-child care
- child and adult immunization and other screening services.
The IRS has placed maximum annual deductible and other out-of-pocket expenses for HDHPs. Each plan varies so be sure to review your plans documentation carefully.
The Truth about Health Savings Accounts
If your employer offers a High-Deductible Health Plan and a HSA, here are 5 reasons you need to consider one right away.
5 Benefits to a HSA
1. Tax-Preferred Treatment
Typically during your benefit enrollment period, you decide the total amount to contribute to your HSA. That total amount is equally divided over the number of pay periods you have in a year. Each pay period, that amount is withdrawn pre-tax and deposited into your HSA. Pre-tax means you will not pay taxes on that income. Over time, the balance grows tax-free and is withdrawn tax-free as long as the money is for qualified medical expenses.
Most HSAs come with a debit card for ease of use when needed.
As of 2017, individuals can contribute up to $3,400 annually, and families can contribute up to $6,750. Eligible individuals 55 or older at the end of the tax year, can contribute an additional $1,000.
2. You Create Another Saving and Investing Vehicle
Everyone who has ever had a major or minor medical emergency knows how quickly the costs add up. In 1980, the average price for a typical hospital room in the US was $127/day. Adjusting for inflation, this amounts to $368 in 2015 dollars. (www.justhefacts.co/healthcare.asp)
An HSA is critical to your overall savings plan. It covers what your health insurance and personal savings account cannot. In addition and critically important, most HSA funds can be invested in mutual funds. Any interest or growth on those investments is tax free. (Shout.)
3. The Balance Rolls Over Annually
Your contributions remain in your account until you use them. There is no penalty or loss if you do not use the full balance each year. This is an excellent and a win-win solution to deal with the highs and lows of life.
If you go a year or two without needing to use your account, the balance continues to grow and tax-free.
4. Take your HSA With You
Your HSA is what is called “portable”. It stays with you if you change employers or leave the work force. This is a great opportunity for long-term planning.
5. Don’t Miss Your Employer’s Contribution
It is common for employers to contribute funds towards your HSA on an annual basis. Contributions can vary and are excluded from your taxable income. This is another reason to be clear about an employer’s benefits before transitioning roles and/or companies. Employers have the benefit of deduct any employee contributions on their business income tax. This creates a win-win for the employee and the company.
Hopefully you see the benefit of adding an HSA to your overall financial plan. It creates an automatic saving and investing opportunity and has tax advantages that are hard to beat.
If you need help getting started, contact your Human Resources for full details.