Headline: Health Savings Accounts can be a Lifesaver… for Some.

Date: 1/17/2021

Body  Don’t let a discussion of Health Savings Accounts (HSA) tie your stomach up in knots.  I started reading the following article on Investopedia and developed a healthy appreciation for them: Health Savings Accounts: Advantages and Disadvantages (investopedia.com) They were developed in an attempt to control healthcare costs(on the theory that people would be using their own money) but might not be your best move.

Normally an HSA is used in conjunction with a High Deductible Health Plan.   (This is a plan with very low premiums, but if you do get ill, you have to pay to a relatively high level before the insurance kicks in.)  To use the HSA, the high-deductible plan must be the only health insurance you have, except for dental and vision coverage. 

You might have heard of Flexible Spending Accounts, well, the HSA is a completely different species.   In this arrangement, money placed into the account is often not taxed, and unlike the FSA, if there is any money leftover in the account, it simply rolls over to the next year.     If you used the FSA, any money left in the account at the end of the plan year (over a small threshold amount) would revert to your employer to use for administration.

What are the Advantages of the HSA?

The nice thing about the HAS is that there is a long and growing list of products and services that qualify as medical expenses.   In fact, as a result of the CARES Act of 2020, OTC medications now count as valid medical expenses.  Additionally, these HAS accounts are highly portable, so, if you change jobs the account travels with you to your new job.

Convenience is also a plus of these accounts.  When you open an HSA, you get a debit card that you use for your medical expenses.  If you do use a different form of payment, you can pay yourself back from funds within the HSA.

Contributions are normally deducted from your paycheck before Federal Tax is computed, so, these funds are tax free at the Federal level.  But, because these funds do not appear in the Federal income number, they also escape taxation at the state level.  These contributions for any tax year can be made until April 15th of the following year.    Any interest earned on the account is minimal, but is also tax free.  (In fact, your interest is so de minimis that you will not even be able to afford the fees associated with the HSA with the interest that it generates.)

In a related manner, withdrawals from these accounts, if used for medical purposes, are not taxed.   But, these accounts do allow one to withdraw money for investments as well.  If the withdrawal is used for this purpose, the withdrawal will be taxed, and if under 65 years of age, there will be an additional 20% penalty.   OUCH!!!  Now, I REALLY DO need some health care!!!

What are the Disadvantages of the HSA?

Because you have a High-Deductible plan, it can sometimes be difficult to put together the cash for a costly medical intervention.   There are regulatory requirements for the minimum deductibles, but the ones offered by most plans are significantly higher.   For this reason, some people might put off a medical procedure that could get worse and significantly impair their health.

The contributions to the HSA are limited to $3,550 per year for individuals and $7,100 per year for families.   But, if you are over the age of 55, there is a $1,000 catch-up contribution allowed (just like an IRA.) 

The additional wrinkle in getting an HSA is that you have to maintain receipts and other documentation to prove that the expenses covered were medical expenses.   This could come up if you are audited by the IRS.

It should also be noted that the funds from the HSA usually cannot be used to pay the premiums related to the High-deductible plan.

If I do decide to open an HSA, how do I do it?

If you do find that the HSA is a good idea for you, finding a good one can be complex.  The first thing to remember is that if not used for medical expenses, this account becomes an investment vehicle.   So, one must be aware of all of the considerations with these accounts, like: administrative fees, ease of access to funds and your other options.  Further, it is not unusual for a financial institution to stop charging the administration fees when your account reaches a certain balance. 

The Verdict

The HSA is sometimes quite attractive.   But, if you are expecting a high degree of medical expenses, it is perhaps not the best option.  In view of the high degree of portability and the low level of premiums, it seems that these plans would be more attractive to younger people who are more often changing employers and more likely to be healthy overall.


Health savings accounts: Is an HSA right for you? – Mayo Clinic

What is an HSA? – NerdWallet

How to Set Up a Health Savings Account (HSA) (thebalance.com)

HSA: What is a Health Savings Account? | The Motley Fool

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

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