Health insurance is not a sexy topic – that is one thing I know for sure. When I put on my big girl pants at the ripe old age of 22 and stepped through the office door of my first “real” job, figuring out how to cover my medical expenses wasn’t running through my mind. No, I, like many of you I’m sure, was full of excitement about how to decorate my new desk, meeting my co-workers, and finally getting started on my path to success. And to be honest, I was also mentally spending that first paycheck – hello, Pottery Barn bedspread and month’s supply of sauvignon blanc. So when I sat down at orientation and the health insurance paperwork was pushed across the table in front of me, all I could do was issue a blank stare. I had NO idea what was the best choice for me, and as you are all well aware, neither high school nor college truly prepare you to make these decisions.
Well, I did what any young 20-something girl does when she’s faced with a challenge she can’t wrap her head around – I called my parents. After walking through the options with them, I decided to take the plunge and go with this newfangled insurance plan known as an HSA. And I’ve had one ever since.
What is an HSA?
For starters, HSA stands for “Health Savings Account” – and it’s exactly that. It’s an account you have with your local bank/credit union/etc. where you and/or your employer can deposit funds that you can then spend on qualified medical expenses. The bank/credit union issues you a debit card or checks (but who uses those anymore) specifically for that account, and you can use it to pay for your co-pays, prescriptions, etc. HSAs can only be utilized with a high deductible health plan (HDHP), which are those plans that have a minimum deductible of $1,250 for individuals (2017 Update: $1,300) or $2,500 for families (2017 Update: $2,600), although many times they are higher than this. Therefore, you can only sign up or contribute to your HSA account if your related insurance plan is categorized as one of these. Move away from an HDHP, and your ability to contribute to your HSA vanishes faster than a cupcake at fat camp. The good news, though? You don’t lose anything still sitting in your HSA account – you can still use it for medical purposes until your balance hits zero.
As always with anything government-regulated, there are stipulations. For 2014, you and your employer are only allowed to contribute $3,300 ($6,500 for families) to your HSA combined, with a $1,000 catch-up contribution if you are 55 or older (2017 Update: $3,400 for individuals and $6,750 for families). So if your employer contributes $2,000 as part of your compensation plan, you can only contribute an additional $1,300 if you’re not on a family HDHP plan. In addition, you are also limited in how much you are allowed to spend from your HSA each year: $6,350 for an individual and $12,700 for families (2017 Update: $6,550 for individuals and $13,100 for families). AND you can only spend it on qualified expenses or else you will have to pay a 20% penalty (ah!) and income taxes on the nonqualified amount you spent. Here’s a list of examples of qualified and nonqualified expenses to help keep you on the straight and narrow:
Why They Rock
I am extremely in love with my HSA. Okay, that’s a bit of a hyperbole, but you get my gist. I contribute to it regularly ($25 per paycheck now that I’ve got a substantial balance in there, but I used to contribute more), and anytime I need anything medical-related, I just whip out my HSA card. The thing I love most is that if something fairly expensive does come along, I don’t feel the sting of it all at one time. For instance, I had a medical expense a year ago that totaled roughly $500. Instead of sitting in a corner crying about depleting my bank account like I would have otherwise, those $25 allocations per paycheck that I didn’t really miss throughout the year took care of it. Bliss, people! Need more reasons why HSAs rock? Here’s my top 6:
1. Great for those with low medical costs
If you rack up high medical bills each year, then utilizing an HSA is more than likely not for you. Why? Because of the high deductible plan that goes with it. If you know you will be incurring a lot of medical expenses, you don’t want to increase your deductible with an HDHP – that’s just more money out of your pocket until you hit that deductible limit. However, if you’re like me and are in fairly good health with infrequent doctors visits (I’m knocking on wood right now), then having that higher deductible really doesn’t impact you much. If at all.
2. Lower Premiums
You’re probably thinking, “Why would I want a higher deductible even if it does come with an HSA?” Well, the reason is simple: you’ll pay lower premiums than you would on a regular HMO or PPO insurance plan. In fact, in a study conducted by the Kaiser Family Foundation, the average annual premium for an individual under a high-deductible plan was $887 in 2013, compared with $1,081 through an HMO. That’s $200 right in your pocket. However, remember this is a trade-off: lower premiums for a higher deductible. If you end up having a medical issue that skyrockets your annual costs, you may end up paying more than you would have on a regular insurance plan. For the most part, though, if you’re young and healthy, an HSA is a good bet.
3. Uses Pre-Tax Dollars
Let’s say it’s 1904 and a prescription cost you $0.99. You grab a dollar bill, hand it to the cashier, and walk out to unhitch your horse and ride home. Well, little did you know, that prescription actually cost more than $1. Why? Because you had to pay tax on that $1 you earned in income. If you were in the 10% tax bracket, then that means you had to earn $1.10 in income to pay for that $0.99 prescription: $0.11 went to the government and $0.99 went for the prescription.
Luckily, HSAs allow you to contribute pre-tax income to your account. So if we’re still stuck in 1904, if you earned $1.10 and put that entire amount in your HSA, you would have that entire $1.10 to spend on that prescription, with no taxes being taken out. An 11 cent savings - talk about a benefit people. (Note: Many employers can take your HSA contributions right out of your paycheck, but if you contribute with your after-tax dollars, you get to claim those as a deduction on your tax return to get that tax benefit.)
4. Qualified Expenditures Are Nontaxable
Not only do you not get taxed upfront on any money you contribute to your account, but you also aren’t taxed on any distributions, as long as they meet the qualified expense requirements. That’s double tax savings, folks, which is rare in the tax world. Let’s hope the IRS doesn’t figure out what a good deal they’re cutting us.
5. Balance Rolls Over…and Earns You Money
Here’s where an HSA is a different than an FSA (flexible spending account) – where as with an FSA you lose any money in your account not used by December 31 each year, you are allowed to rollover any balance you have in your HSA from year to year. Basically, anything you put in your account is yours until you spend it. So suck it, FSAs – you have no place in a 20-something’s life.
And not only does your balance rollover, it also earns money. Granted, it’s not a lot (I think I’m earning less than 0.1%), but you still are earning something on that cash sitting in there. And again, not taxed. That’s triple tax savings! Holy Jesus, it’s a miracle.
6. Go Where You Go
The last great benefit of an HSA? You can take it with you wherever you go. Once you have an HSA in your name, that puppy stays with you – it’s like a bank account that you can only use for medical expenses. So even if you switch states, change jobs, become a hippie, join a reggae band, whatever, you will always have access to the cash in your HSA.
Alright, I think that covers the basics. And as I’ve probably overloaded your brain enough as it is, we’ll stop there. Just remember, an HSA coupled with a high deductible plan is a great insurance option for those with low medical costs who are trying to save some cash. It’s always been my number one choice and hasn’t failed me yet (again, knocking on wood here). As always, if you have questions, feel free to comment below or email me at email@example.com!