When I sat in Human Resources on day one of the job, I received a mountain of papers to look over and return. Most of the papers were easy and quick to get through. Then I got to the healthcare section. I had no idea what type of coverage I needed. The distinctions between the plans were puzzling. In-network cost vs. out-of-network, deductibles, prescription coverage, specialist cost, etc... Some of the co-workers I asked all had the same plan which I considered, but it was expensive ($500 or more a month). So I kept looking through the plans and then I came across the Health Savings Account or HSA.
KEY POINTS
Save on taxes.
Invest contributions.
Low monthly premiums.
HSAs were established by Congress in 2003. The HSA is attached to a high-deductible health plan. The IRS defines an HDHP as any plan with a deductible of at least: $1,400 for an individual or $2,800 for a family. The HSA offered through my work covers both my wife and I. In exchange for low premiums each month, we have a high deductible: $4,000 (in-network) or $8,000 (out-of-network). Once we spend $4K then our insurance will kick in. There are out-of-pocket maximums too. If you are considering an HSA then a question you need to ask yourself is:
Do you want to pay more each month and have a lower deductible?
or
Do you want to pay less each month and have a higher deductible?
I wanted to pay less. It doesn’t make much financial sense to pay a lot for healthcare each month that we will not use. When my wife or I go to the doctor then we pay in full which isn’t always cheap. On the other hand, we do not go to the doctor all that often so it’s not a big financial hit. We are both young and healthy so an HSA is the right choice for us.
Now, on to the key points of the HSA.
CONTRIBUTIONS
You or your employer, or both, contribute pre-tax dollars into this account. For 2023, the maximum contribution is $3,850 for an individual and $7,750 for a family. Some employers may match your contributions up to a certain amount. My employer contributes $200 per year to “jump start my savings” and then it matches my contributions up to $575 per year. I essentially receive $775 each year free into my account. I always contribute enough to meet my employer's match. You do not want to leave money on the table.
INVEST
Just like a 401k or Roth IRA, your contributions can be invested. I opened my HSA with Fidelity in 2019 and each check contribute to an ETF (exchange-traded fund) that holds mid-cap stocks. Most HSA providers have a variety of options you can invest in such as stocks, bonds, ETFs, and mutual funds. Of course, you do not have to invest your contributions into the market but if you do then the funds can be left to compound for years.
WITHDRAWALS
If I want to make tax-free withdrawals from the account then it has to be for qualified medical expenses. There is a huge list but some of them can be contacts, X-rays, prescription meds, etc… If you pay for a medical expense without making a withdrawal, you can be reimbursed years later as long as you keep the receipt. I’ve never made a withdrawal but I read it’s a pretty easy process.
TAXES
The HSA is a triple tax-advantaged account. The money you put into it reduces your taxable income, the money inside the account grows tax-free, and any qualified withdrawals are tax-free. This is the only retirement fund that works this way. If you do not end up using the money in your HSA, when you turn 65, you can make penalty-free withdrawals for non-medical expenses but you will have to pay income tax. If you take out money before you’re 65 for non-medical expenses then the distribution will be taxed and you’ll incur a penalty from the IRS.
I did not fully understand the benefits of an HSA until weeks after I opened one. They reduce your taxes, offset medical costs, and can serve as an additional retirement account. They are also portable so if you ever leave your job or switch healthcare plans the HSA is still your name. You are the sole owner of the account, not your employer or health insurer. Whether or not you should choose an HDHP is all up to your health situation. Choosing a healthcare plan is stressful and complicated since you do not know what type of medical expenses you are going to incur in the future. If you are young and hardly ever go to the doctor then you should consider an HDHP. You’ll pay less each month to an insurance company and as a result, you’ll be able to put that money into your HSA.
Visiting Houmas House Plantation