Health Insurance

Health Savings Account (HSA): Meaning, How It Works, Pros & Cons

If you have a high-deductible health insurance plan, you are eligible to contribute to a health savings account (HSA), which is an investment vehicle that offers tax advantages. HSAs are frequently provided by employers, but you can also start your own. Up to the HSA annual limitations, contributions are tax-deductible, and funds can be withdrawn tax-free for qualified medical costs. After age 65, you can invest and take funds from an HSA without incurring penalties, though distributions that aren’t used to pay for covered medical expenses will be subject to tax at your regular income tax rate.

Subscribers with a high-deductible health plan (HDHP) through School Employees Benefits Board (SEBB) are eligible for health savings accounts (HSAs). HSAs can be used to cover out-of-pocket medical costs that are IRS-approved. Here is a breakdown of everything you need to know about HSA to make it easier for you to grasp it:

 

What Is A Health Savings Account (HSA)? 

A Health Savings Account (HSA) is a sort of personal savings account that you can open to cover specific medical expenses. When used for qualified medical expenses, like deductibles, copayments, coinsurance, and other costs, an HSA enables you to save money and withdraw it tax-free. Those who are covered by specific high-deductible health plans are qualified to make contributions to HSAs (HDHPs). With HDHPs, the monthly payment is typically smaller, but you first bear a larger portion of the expense of your medical care. If you have Medicare coverage, a plan that covers its portion of a covered service without requiring you to pay a deductible or copayment first, or both, you are not eligible to make contributions to an HSA (called “first dollar coverage”).

Health Savings Accounts (HSAs) are offered by banks, insurance providers, and other financial organizations. When you contribute to the account and utilize the funds for certain, out-of-pocket medical expenses, such as:

  • Long-term care services that are suitable.
  • Psychiatric treatment and psychological therapy.
  • Acupuncture.
  • Ambulance fees
  • Physician visits.
  • Hearing devices.
  • Prescription medicines

Sometimes you can use the money for similar medical expenses for your spouse or family, and if you don’t use it, it rolls over from year to year.

Plans that are HSA-eligible are typically offered through SHOP, the Health Insurance Marketplace, or outside of the Marketplace. In the majority of states that use HealthCare.gov, HSA-eligible plans are also accessible. When you preview options with price estimates on HealthCare.gov/see-plans or when you apply for health insurance, you can learn if your state has HSA-eligible plans.

 

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How Does A Health Savings Account (HSA) Work?

  • HSA contributions can be made online from your bank account or through payroll deduction. You may also have other people, such as a spouse or parent, contribute to your account (assuming your employer is eligible to contribute).
  • You have two options for paying for qualified medical expenses: using a payment card or with cash. If you pay out-of-pocket, you have the option of paying yourself back or keeping the money in your HSA to increase your savings.
  • Manage your HSA account round-the-clock via the Optum Financial mobile app or online account.

There is a monthly administrative service charge for workers who leave their jobs but maintain their HSAs open and active with Optum Financial. Retirement beneficiaries who have chosen the IYC HDHP/HSA benefit option are exempt from paying the monthly administrative charge.

 

What Are The Benefits Of A Health Savings Account (HSA)?

  • No income tax is paid at the federal level. An HSA account does not subject you to tax on contributions or interest earnings. Additionally, withdrawals for legitimate medical costs are tax-free. Note: Typically, insurance premiums are not regarded as legitimate medical costs.
  • No time limit on the funds. You can continue to make HSA donations. Until you utilize the money, it remains in the HSA.
  • Useful for a spouse and any dependents. Sometimes, even if your high deductible health plan does not cover them, you can use your HSA to pay for eligible medical expenditures for your spouse and dependents.
  • If the job changes, HSA remains in effect. Even if you switch companies or retire, you can keep your HSA.

 

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Pros Of Health Savings Account (HSA)

Unexpected medical expenses shouldn’t be as stressful if you have access to an HSA. However, these accounts also have other benefits.

  • Tax-free earnings: Any interest or other earnings made on the money in the account are tax-free. The majority of HSAs only receive a pitiful 0.1% in interest.
  • Pretax Contributions: Your company deducted pre-tax funds from your paycheck to make contributions. To put it another way, your company won’t deduct taxes from these funds. That indicates that neither your gross income nor federal income taxes apply to the money. The majority of states exempt contributions from state income taxes.
  • Convenience: Most HSAs provide a debit card that may be used to pay for qualified costs like prescription drugs. When a bill is finally received in the mail, you can call the billing office and use your HSA debit card to make a payment. If you paid a medical expense with another form of payment and want to compensate yourself, you can do so from an HSA.
  • Many Expenses Qualify: Medical, dental, and mental health care are among the many expenses that qualify. In IRS Publication 502, Medical and Dental Expenses, are described in depth.
  • Other People Can Help: You, your employer, a relative, or anybody else who wishes to contribute to your HSA may do so. Employers have the option of contributing or not. Of course, it has no bearing on a self-employed person’s ability to fund an HSA.
  • Tax-Free Withdrawals: If you utilize your HSA withdrawals for qualified medical expenses, you are not liable to federal (or, in most circumstances, state) taxes on those amounts. The remaining funds in an HSA can be invested in the interim. To increase your prospective profits, you can buy stocks, bonds, and other kinds of assets. The majority of financial consultants will strongly advise investing in safe assets like US Treasury bonds. First and foremost, this account serves as a reserve for unplanned medical bills.

 

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Cons Of Health Savings Account (HSA)

If you are eligible for an HSA, there are several drawbacks to think about.

  • Pressure to save: Some people can be hesitant to seek medical attention when they are ill or injured because they don’t want to squander their HSA funds.
  • Maintaining records: You must preserve receipts to demonstrate that your withdrawals were utilized for permissible medical costs.
  • Taxes and Penalties: You will be responsible for paying income taxes as well as a 20% penalty if you withdraw money for non-qualified expenses before the age of 65. After age 65, you will still owe taxes but not the penalty. An unexpected expense that isn’t medical can be difficult for someone to deal with. They have money in savings but are unable to access it without suffering a loss of income.
  • High-Deductible Requirement: An HDHP, which you must have to be eligible for an HSA, may cost you more money than other types of health insurance. Even with funds in an HSA, it may be challenging to come up with the money to cover the deductible for an expensive medical operation, even though your monthly premiums will be lower. Anyone who anticipates having significant medical expenses during a specific plan year should think about this.
  • Fees: Depending on the institution, some HSAs have a monthly maintenance fee or a per-transaction cost. The fees are almost definitely larger than any interest the account might make, even if they are normally not very high and hurt your bottom line. These charges may occasionally be exempt if you keep a specific minimum balance.

 

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Final Thoughts 

Overall, HSAs are among the strongest tax-advantaged investment and savings vehicles permitted by U.S. tax law. They are frequently referred to as triple tax-advantaged because donations are not taxed, the money can be invested and grown tax-free, and withdrawals are not taxed as long as they are used for permissible medical expenditures. Medical costs tend to rise as people age, especially as they near retirement and beyond. Therefore, if you qualify, creating an HSA early and letting it grow over time can help you significantly secure your financial future.

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