After nearly two decades and 26 million HSAs opened, people are still confused on what an HSA is. Common questions include how does an HSA work, what does an HSA do, and even, what does HSA stand for? To fully understand what an HSA is and the benefits an HSA offers, let’s start with the basics.
What does HSA stand for?
HSA is an acronym for health savings account. Now that leads to the inevitable next question, ok, but what is an HSA? An HSA is tax-advantaged, special-purpose savings account that should be used to pay for authorized medical expenses. The HSA has to be paired with a specific type of health insurance.
What is HSA health insurance?
HSA health insurance is not a type of insurance, instead HSA accountholders need to have HSA-compatible plans. The Internal Revenue Service sets the rules for HSAs and, according to those rules, the HSA can only be opened if the accountholder is covered by a high-deductible health plan (HDHP).
An HDHP is defined as a health plan that, for 2019, has a minimum annual deductible of $1,350 for individuals and $2,700 for those with family coverage. Total annual out-of-pocket expenses for an individual can’t be more than $6,750 or $13,500 for family coverage. These HSA-compatible plans often offer significant monthly savings on premiums as they are more affordable because of the higher deductible.
Self-employed individuals who are covered under a qualified plan may also contribute. You are not eligible for an HSA if you are covered by your spouse’s health insurance plan that is not a qualified HDHP. You are also not eligible for an HSA if you are claimed as a dependent on another person’s tax return or if you are enrolled in Medicare.
However, if you already have an HSA and are enrolled in Medicare, you can continue to use your HSA funds for eligible medical expenses, but you cannot make new HSA contributions or open a new HSA. Once you have an HSA and have contributed to it, you can spend it on qualified healthcare expense, regardless of the type of healthcare coverage you have.
What does an HSA do?
The main purpose of an HSA is to serve as a vehicle for saving funds to pay for those qualified medical expenses until you reach the deductible of your HDHP. This can include some expenses that may not be paid by your health plan, like vision and dental expenses.
The account serves as a bridge between the higher deductible and the point at which the health insurance begins paying according to terms of the plan. Check a list of qualified medical expenses here.
The pairing of the HDHP and HSA is a powerful combination that can provide the accountholder with greater flexibility and control over healthcare spending. Since you’ll be paying for substantially all of your healthcare costs until you reach your deductible, it is wise to take advantage of the extra services your insurer may offer.
These can include telemedicine, wellness programs, diabetic educators, discount programs and others. Some insurers offer lists of various medical providers and the price they charge for office visits. Since you can use your HSA for deductibles and co-pays, it also pays to take advantage of discounts such as three-month orders of prescription drugs from pharmacy benefit managers.
If you don’t have vision coverage, it can also pay to shop for eyeglasses or contact lenses as many optical stores have sales or offer discounts. Be sure to check your medical coverage because many include the eye exam at no out-of-pocket cost to the accountholder under preventative medical coverage.
Once you have met your annual deductible, the HDHP begins performing like traditional insurance. For example, there may now be traditional coverage that pays for 80% of medical costs while you will pay 20%. Depending on the insurance plan, you may have coverage of up to 100%, so it pays to know your plan and how it works.
So, what does an HSA do? It allows you to take advantage of three types of tax savings while providing a savings account to use for present and future medical expenses.
How do I fund the HSA?
This can be a puzzle to some people. If your budget is fully spoken for, where will the money come from to fund the HSA? Many accountholders who need cash will take the HDHP because of the lower monthly premium, but then absorb the savings into their lifestyle. Though it may be tempting, resist spending the premium savings and instead use that money to begin funding the HSA, which can be a substantial seed of the account.
For example, if a traditional health plan would cost you $300 per month (likely more), and the HDHP costs $150 (possibly less), that $150 per month can be used to begin funding the HSA with $1,800 of funds that you did not have to budget for or take from your lifestyle. Tax savings, which can be substantial and which we’ll soon outline, can provide additional savings that can be routed to the HSA.
The next place there may potentially be found money is from your employer. Many companies contribute to employees’ HSAs either directly or as matching funds. Another way to begin benefiting from a Bend HSA is to enroll in the HDHP then open the HSA. Once you receive an explanation of benefits, or EOB from your health insurance company, that shows what the medical provider billed the insurance company, what any discounts may be to the insurance company, and what amount you may be responsible for. Then arrange for a one-time contribution on your Bend account online in the amount you owe to the HSA, with which you can pay your portion of the bill.
Your Bend HSA online account will show what the tax savings will be from the transaction. Should you want to take it one step further, you could contribute the amount of the tax savings to the HSA, recovering it when you receive your tax refund.
A main benefit of an HSA is that the money contributed, whether by you, an employer, or gift from a family member, is always yours and is portable should you change jobs or enroll in a non-HSA compatible health insurance. Should you switch to a different type of coverage, you can still use the money for qualified medical expenses, though you would not be able to make additional contributions. You can also let the funds grow for use later.
Triple Tax Savings for HSAs
A health savings account offers three types of tax savings:
Contributions are 100% tax deductible, up to the annual legal limit, much like an IRA.
The interest or other growth of the HSA is tax deferred.
What’s more, the funds in the HSA can be used tax-free for qualified medical expense upon withdrawal.
Should you decide to use the money for other purposes upon retirement, only income tax at your current rate is due.
This combination of tax benefits makes it the account of choice of many. Because of the option to use the account for qualified medical expenses, the funds and their growth over the years are available to use completely, without any tax liability. One estimate puts the projected average medical expenses for the average couple during retirement at $285,000, so every penny will count.
The account can also be managed in such a way that it can help provide funds for retirement – either for medical or living expenses. Because you’re likely to need every penny in retirement either for health expenses or living expenses, growing the account as much as possible is important.
Quality HSA administrators offer the opportunity to invest HSA mutual funds that hold stocks, bonds and other mutual fund investments to offer the maximum growth potential. For example, Bend makes available a slate of 34 mutual funds that represent multiple asset classes. Mutual funds make the process of choosing and making an investment, much like a 401(k).
A variety of investments is important to meet accountholders’ preferences and risk tolerance. A good selection includes income funds; bond funds; stocks including emerging market and blue-chip funds; funds tied to market indexes; and combination funds that invest in stocks and bonds.
One popular option is target-date funds that invest with the goal of maximizing growth between today and a date in the future, usually around retirement. Bend makes available eight such funds with varying target dates.
Our banking partner places emphasis on risk management by diversifying through asset allocation and security selection. The funds in the investment platform are selected based on quantitative and qualitative measures. Our investments represent the following attributes:
• Wide spectrum of risk
• Passive (index) and actively managed funds
• Life strategy & target date funds
• No fund minimums
• No trade fees
• Earnings reinvested at no cost
Help in making the HSA work efficiently
Though many accountholders are confused by health saving accounts, a little education and assistance can guide employees to an optimal HSA experience. To assist, Bend Financial has pioneered the use of artificial intelligence (AI) and machine learning technologies to help optimize HSA tax benefits and health spending through your HSA accounts. The concept is simple. The Bend HSA account seamlessly captures data about an individual’s financial health, such as claims data, payment transactions, and deductibles.
The Bend HSA recognizes when someone makes a qualified medical payment or has a qualified medical expense and guides the person to get reimbursed or make the payment. Because Bend is linked to the employee’s methods of payment (such as a checking account or credit card), Bend can quickly facilitate the payment through the HSA account. On a $70 payment, this simple approach could save $20 in taxes.
Over time, Bend’s AI and machine learning capabilities will learn the employee’s transaction behavior and health situation and begin to make recommendations. For example, the Bend Advisor might suggest that a person begin making regular contributions to the HSA account, or increase their current contribution based on their spending history. If the employee agrees, Bend’s integration with the payroll company will update payroll deductions behind the scenes without the employee or the employer needing do anything more.