Practical Guide & FAQ to the Health Savings Account (HSA)

This guide provides valuable insight into the HSA. Is the Health Savings Account worth it? This post answers that question and more, including: “What are Health Savings Accounts?”, “How to Use your Health Savings Account”, and how to “Use your Health Savings Account for Retirement!” 

With Benefit Elections coming up for many employers and a New Year on the horizon, take advantage of this guide to help make your own personal finance decisions, and apply and enhance Mêtis in your Money Matters!

WHAT IS A HEALTH SAVINGS ACCOUNT (HSA)?

According to the technical definition of the IRS, a “Health Savings Account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur.”  In my opinion, and in non-technical speak, I think of the HSA as an account I own with favorable tax treatment which I can use to cover eligible expenses and also save for retirement purposes.  

It is worth noting that you need an eligible health insurance plan, a High Deductible Health Plan (HDHP), in order to open your HSA. The HSA is a very powerful tool for use now and in the future, and they deserve serious consideration to see if they make sense for you and your family.

Who can open a Health Savings Account?

As we mentioned, HSAs are paired with High Deductible Health Plans. Standard information on plans and providers are typically available from your employer, and I recommend checking with your HR team to explore your individual options. Here are some questions to ask your HR department: 

• Are you eligible to participate? If so,…
• Who is the HSA provider your company has partnered with?
• When are Enrollment or Benefit Election periods are open for the HSA?
• Does your employer make contributions on your behalf?
• Does your employer’s default HSA setup allow for investment options?
• How does one set up beneficiaries?

Who offers a Health Savings Account (HSA)?

Firstly, make sure your HDHP is in place (consider checking with your HR department if you don’t know off the top of your head). Aetna, UnitedHealth, and Cigna are some examples of health care companies with plans that paid with the HSA. 

After that, get set up with an HSA provider. Examples of HSA providers include HSA Bank, HealthSavings Administrators, and Fidelity. Your employer could also have a working relationship with any one of these (or different) providers. Benefits and fees vary, and I think a great starting point is to check with your local HR team to see what your company recommends. 

Some things to keep in mind when looking into HSAs are fee structures (including transfer costs), employer contributions, taxes, and investment options. Shop it around and see what fits best for your needs!

My own personal experience with this was relatively quick and painless (as far as paperwork goes). I was able to leverage my local Human Resources team, the information from my health care provider, and materials from my HSA provider to knock it out. As it turns out, my company had a good HSA provider lined-up and I went that route.

The Health Savings Account (HSA) vs. Flexible Spending Arrangements (FSA)

Generally, I think of FSAs as a “use it or lose it option” where your contributions do not roll into the next year. I am aware of three different types of FSAs (Health Care, Dependent Care, and Limited Purpose) which have their own rules (check with your employer) on how to use them. FSAs do offer tax benefits, and there are options that could align with your needs (e.g. Dependent Care.) 

On the other hand, HSAs roll over to the next year, and the next, and so on. This is an excellent feature of the HSA, and I try to contribute as much as possible so I can use it in Retirement as well.

At the end of the day, keep in mind HSAs are coupled with high deductible plans. If you are not using one, the FSA might be your best option as it still offers tax benefits. Either way, take advantage of all tax benefits where you can!

HOW DOES YOUR HEALTH SAVINGS ACCOUNT WORK? HOW TO USE YOUR HEALTH SAVINGS ACCOUNT.

After establishing a qualifying health care plan and setting up an account with an HSA provider, you’ll be able to use those funds for eligible expenses. In my experience, those expenses can be submitted by using a debit card for the transaction directly, or via reimbursement. I prefer the debit card route, but make sure you’re only using it for the qualified expense. For example, be careful about charging a soda or snack along with your qualified medical item when at Walgreens. Consider separating the transactions to avoid any penalties.

Use your Health Savings Account (HSA) for Eligible Expenses

A quick Google search will bring up myriad lists of eligible expenses. I recommend making sure you’re consulting a reputable source such as the HSA provider or health care provider. I was able to find convenient PDFs and mobile phone apps for my provider and have consulted them on a regular basis. Here are a few lists I found online:

• HSA Bank’s list of Eligible Expenses
• Health Savings Administrators’ list of Eligible Expenses
• Fidelity’s list of Eligible Expenses
• IRS Publication 502 (check for tax filing year)

Additionally, I found this resource that might be a quick and easy reference with a list of expenses that are eligible and ineligible. Be sure to consult your personal plan for exact details.

Can you use your Health Savings Account for Dental?

According to the IRS in Publication 502, yes, certain dental treatments are eligible: “You can include in medical expenses the amounts you pay for the prevention and alleviation of dental disease. Preventive treatment includes the services of a dental hygienist or dentist for such procedures as teeth cleaning, the application of sealants, and fluoride treatments to prevent tooth decay. Treatment to alleviate dental disease includes services of a dentist for procedures such as X-rays, fillings, braces, extractions, dentures, and other dental ailments.” 

I have been through this process several times, and my family uses the HSA debit card to pay at the end of the preventative cleaning. 

One point my Dentist’s office made to me was to carefully plan your visits to make sure they fall within the proper time intervals. For me, that is every 6 months. As such, I make a point to avoid a “fight” with coverage and schedule them every 6 months and 1 day apart.

Contribution Limits to your Health Savings Account (updates yearly)

A quick check on the IRS or HSA provider will point you to the contribution limits for the year. This includes what your employer contributes on your behalf, and you should be careful not to over-contribute (if you do, take action in your current tax filing year).

In recent years, the amounts have increased each year. I appreciate this as it allows users to keep up with inflationary costs, etc. In keeping with previous sections, here are a few links outlining and defining the annual HSA contribution limits:

• HSA Bank’s HSA Contribution Mapping
• Health Savings Administrators’ HSA Contribution Mapping
• Fidelity’s HSA Contribution Mapping

Summary of Annual HSA Contribution Limits

Category	2020	2021
Individual, Max	$3,500	$3,600
Family, Max	$7,100	$7,200
55 years old+	+ $1,000 “catch-up”	+ $1,000 “catch-up”

Your Health Savings Account and Taxes: Is your HSA Contribution Tax Deductible? Is your HSA Taxable?

In my opinion, one of the most powerful features of the HSA is the “triple tax benefit” available to those using the account properly. In fact, I think HSAs are one of the most advantageous accounts available!

• Firstly, if made through your employer in accordance with annual limitations, those contributions are considered pre-tax, thereby lowering your taxable income. 
• Secondly, and as applicable in your HSA provider’s plan, investments grow tax-free -including interest earned. (Note: HSA providers have different stances on investment benefits, minimum thresholds, etc.)
• Thirdly, the HSA money withdrawn and spent on eligible expenses is tax-free.

My friend, this is incredible! When used at full potential, it is like blending Traditional and ROTH IRA benefits into one account. If done properly, users could effectively NEVER pay tax on their HSA dollars!

With this powerful option, try to save as much as possible in your HSA during the younger years. If possible, try to limit the use of your HSA as well. This will allow you to maximize the rich tax benefits in your later retirement years.

USE YOUR HEALTH SAVINGS ACCOUNT FOR RETIREMENT PURPOSES!

As we mentioned, the HSA is especially helpful in saving for retirement. I recommend limiting or delaying the use of the funds within the HSA until later, especially given the attractive benefits. HSAs can help solve the retirement puzzle, and I believe they should be preserved as long as possible while also putting as much as you can into the accounts now and over the years.

Does a Health Savings Account expire?

These accounts follow the individual, they are portable (you can transfer HSAs from one provider to another), and they are yours even after the year-end! Unlike an FSA which expires at the end of the year (use it or lose it), the HSA does not expire after the calendar year. Invest without worrying about forfeiting the money next year. 

Health Savings Account Investment Feature

Depending on the HSA provider, you could have the opportunity to invest your HSA dollars in addition to holding a cash balance. My approach has been to hold our family “max out of pocket” in cash or cash equivalents (e.g. Money Markets) and then invest the rest into a moderate risk blend of index funds. That way our HSA covers the short and long-term!

Regardless, use the investment feature to save as much as possible for retirement at which point you can use HSAs to help solve for financial challenges like certain Medicare premiums, aspects of “tax-qualified” Long-term Care (LTC) plans, or other expenses (remember, non-eligible expenses are not tax-advantaged but are still allowed). 

IS THE HEALTH SAVINGS ACCOUNT (HSA) WORTH IT?

The HSA is empowering! Used in an optimal fashion, it provides what the industry refers to as a “triple tax benefit”, it follows the owner of the account, doesn’t expire, covers eligible medical expenses, and is an outstanding component to a solid retirement plan. In my opinion, it is absolutely worth it! 

Are they Good or Bad?

Without a doubt, HSAs are not good… they are FANTASTIC! For my family, this is one of the most powerful savings financial tools at our disposal. I can appreciate that others have different circumstances that could change the degree of usefulness. However, if you and/or your family under your plan are reasonably healthy and you have the means to contribute investing in an HSA could be one of the best choices you make!

Applying Mêtis in Money Matters

We love the HSA, and our plan has been to come as close as possible to the annual contribution limits. I’m fortunate to work at a great company where they also contribute towards the maximum making the task a little easier. My wife and I had to get our budget and personal finances locked down before we could consistently contribute to the HSA. With that in place, we are able to “set it and forget it” so that our balance grows steadily over time.

Our Balanced Approach to Contributions

There are more investment opportunities than there are dollars in my house to use. I try to pick the most effective combinations at my disposal. For example, I contribute to my 401(k) to take advantage of the full company match. Beyond that, I contribute money to the HSA. That way, I’ll have three dedicated “buckets” in retirement to draw from: my pension, 401(k), and HSA. Nothing is bulletproof, but it is a good start!

I hope you were able to get some good information from this post! If this is a good fit for your family situation, give the HSA some serious thought. I wish you the best of luck in your endeavors! Keep up the hard work, keep developing yourself, and keep cultivating Mêtis in your Money Matters. Diligently pursue excellence, my friends!