HSA Basics and How I Get Free Medical Too

hsa money

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What is an HSA?  Just what it says it is, a “Health Savings Account.”

Many employees are eligible for either an HSA or a FSA (flexible spending account) as a money savings mechanism for health purchases when they are purchasing insurance.

HSA vs. FSA accounts

The most common confusion I seem to run into when mentioning my HSA account, even at my doctor or dentist office is: it is not the same thing as a flexible spending account (FSA).

I can see why people would be confused.  At first glance, they are very similar.  In both you put away money pre-tax, decreasing taxes on your take home pay.  You use the money from both to pay for eligible purchases such as copays and office visit costs and prescriptions.  In both, an employer may contribute in addition to what the employee adds.

But that’s pretty much where the similarities end.  And here is the biggest, most important difference:

In an HSA you, the employee, owns all your money.  In an FSA, the employer owns any funds you don’t use at the end of the year.

This sounds CRAZY!  Because I have rarely used my insurance for more than a few doctor visits, I have not been willing to put myself in a situation where I leave money on the table at the end of the year.  I have never opted to use an FSA when I had an HSA as another option (or at any other time, I’ve never used an FSA).

There are some other caveats of course.  And anyone who has both presented to them as an option should carefully read your plan literature in deciding which is for you.  In an FSA you have access to all of the money from the beginning of the plan year.  In an HSA, you only have access to what you have saved so far (and any employer match if you have it).

Some other differences include you can contribute significantly more to an HSA than an FSA.  Additionally, to take part in an HSA you must be participating in a high-deductible insurance plan (aka HDHP).  For 2018, that means you must be have a minimum annual deductible of $1350 for an individual or $2700 for a family.

Another important difference is, as long as you meet the above deductible qualifications, you can sign up for an HSA plan on your own, through many banking/investment organizations.  You do not necessarily have to go through an employer.  With an FSA, because the employer technically “owns” the funds, you can only use it if you sign up through your employer.

It’s like a 401k, for your health

I already mentioned that your HSA contributions are pre-tax and reduce your taxable income.  An HSA also grows tax free as long as you continue to use it for approved health related expenses.  Once you hit 65, you can use the money for anything, as if it had been a traditional IRA (here’s some good info on how your HSA fees change after 65).  Use it early, and you’ll be hit with tax penalties.

At a pretty healthy maximum contribution rate of $3450 for individuals and $6900 for families for 2018, if you can max this account out, that is some serious savings you are putting away for future health spending.  I have been maxing out my HSA for 4 years.  Even after paying for a baby labor and delivery and some major surgery for my husband (on top of dental visits, eyeglasses, etc) I have over $25,000 in my HSA accounts.

You won’t believe this!

Like a 401k, many employers also offer some form of match.  My employer offers both a partial match to a certain dollar value AND they offer bonus HSA contributions for meeting health targets (such as BMI or not being a smoker).

“The ultimate HSA hack”

Between my company HSA match and my family meeting health screening targets: my premiums for both medical and dental are effectively FREE!

Seriously!  Check the math if your employer offers any incentives.  I consider my employer match money “free money” since it goes in to an account I own.  This means they’re also paying the insurance premiums for my family.

So who is an HSA good for?

As a family who doesn’t spend a lot on medical expenses, this is a great option for us.  Why would I want to pay more in monthly premiums for insurance that I wouldn’t even use?

I wish I had the napkins I did all my calculations on, but my logic came to something like this (and I checked this for two different jobs with HSA accounts):

Dollar for dollar, if you looked at the cost (my options) for a traditional plan with “high” premiums with no HSA versus a high-deductible plan + my monthly HSA contribution, I was paying close to the same amount per month for either plan.

Lemme break it down:

I tried to explain it like car insurance to another employee.  Because I know that I can afford to meet my deductible of $3000 before insurance kicks in, I get to pay a much lower premium throughout the year (this logic applies whether or not you decide to open up an HSA account).  But because I am tax incentivized to open the HSA account, I feel doubly confident that I will be able to pay my deductible if I have to, and I grow my money tax free!

Seems like a no brainer to me!  Especially with the maximum out of pocket spending on high deductible plans defined by the IRS as $6650 for an individual and $13300 for a family for 2018 (meaning the most you can be charged in a plan year for your medical care before insurance picks up all the rest).  If you keep contributing to the health savings account over the years you should have a safe amount to cover any catastrophes, childbirth, etc.

Factor in any company match if you get it.  You might be throwing money in the trash not taking advantage of your HSA plan.

And when you really start accumulating you can invest those funds…

USUALLY.  There may be some plans where this doesn’t work, so make sure you to read your plan paperwork.  I would think you could roll it over to somewhere where you can invest also.  I’m not going to get into this here, but, it’s an important part of your account.  When you’ve reached certain balance minimums, you can begin investing.  This is when the HSA becomes a really powerful tool for your retirement planning.  Once you hit 65 you can generally pay for your medicare or private health insurance premiums with your HSA with no penalty OR taxes on top of regular health spending.

Links:

IRS 2018 HSA and HDHP numbers

 

 

6 comments

  1. Hey Frugal Pharmacist, I absolutely love my HSA… I’m even passing up free chiropractic adjustments which are covered under my wife’s insurance just so I can have the HSA. I’m 31 years old with no medical issues/expenses, so I’m using the account to invest in low fee vanguard index funds (the same as my Roth IRA and individual brokerage accounts). Can’t beat tax free investing and growth, as well as company match! Only restriction is I have to keep $1k uninvested in the HSA account.

    Way to spread the word!

    1. They’re awesome! Well worth sacrificing free chiro. I need to update the sweep on mine, I’m keeping 10k in the HSA as cash but want to drop that to about 5k. Had kept it high after baby born and a surgery my husband had so I could pay for everything, but don’t need to keep that much anymore. The rest is invested for me too in a total market fund. My options for investing aren’t great and I’m thinking about seeing if I can continually roll over the investment account to vanguard HSA or something? Not sure how that would work yet.

    1. Thanks for checking in! I love the feedback!

      Remember, if you have a high deductible plan (does your job not even offer a low monthly payment, high deductible plan?) you can still set up an HSA on your own for the tax incentives.

  2. Even better is that if your employer deducts it, also free of FICA, state and local income taxes. Pretty much totally tax free!

    1. Indeed! Insurance is pre tax and then HSA contributions to the max are also. However, unlike on a 401k, the employer contributions to my HSA DO count to my annual limit. So that’s alse less out of pocket for me. Thanks for stopping by!

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