What is HSA

A lot of people ask this question, “What is HSA?” HSA, also known as a health savings act, allows employees to transfer pre-tax dollars from their income into a health savings account for medical use. Essentially, the money put into the health savings account can help pay any deductibles. Once the deductible is met, your health insurance will start paying. Any money left in the savings account earns interest. Therefore, HSA = high deductible insurance + savings account.

Advantages of HSA

  • Your savings helps pay the deductible instead of using income that is already taxed
  • Tax-deferred growth.
  • There is no use it or lose it mechanism. Any money left over in the account is yours to keep.
  • Flexibility – you can use the money in the health savings account for a variety of medical expenses, such as office visits, prescription medication, eyewear, and more. You can even use the account to pay for such expenses for your spouse and dependents.
  • Tax-free savings – you can keep the funds in the account and continue earning interest as long as the money is kept in the account. Such tax benefits can also include tax-free investment earnings, tax-free withdrawal for qualified medical expenses, and deductions for annual contributions.
  • The cost of health insurance could be less.
  • Health savings accounts would be good for those interesting in trading higher out-of-pocket costs for lower premiums, those who want more control over their health care spending and expenditures, those attracted to the many tax benefits that an HSA offers, and anyone interested in using the savings account to pay for certain medical expenses.
  • A HSA is also appropriate for those nearing retirement as the money can be used to offset the expenses of medical care even after retirement. While someone over the age of 65 enrolled in Medicare can no longer contribute to his or her HSA, the funds can still be used for out-of-pocket medical expenses.
  • Even those who are otherwise generally healthy may wish to use a HSA for future healthcare expenses. To reiterate, the funds have no “use it or lose it” provision; therefore, the funds can sit in the account, accrue interest, and then be used when needed.
  • The HSA is particularly attractive to those who foresee a significant increase in medical visits and associated expenses.
  • HSAs have investment potential. Particularly, the funds in the savings account can be invested in mutual funds, stocks, and other investment products to generate even more money. Employers can assist employees in choosing which investment product is right for someone.

How HSA Works

Every year, employees can decide on how much to contribute to their HSA; however, they cannot exceed the government-mandated threshold. To make it simpler, employees can enroll in automatic contributions in which funds will automatically be taken out of their income and placed into the savings account. Those with a HSA with obtain either a debit card or paper checks, which they can then use on eligible medical expenses. The debit card includes deductibles, copay charges, and coinsurance as well a other certain medical expenses. Note that insurance premiums generally cannot be paid for with your savings account. Furthermore, if someone uses HSA funds on non-eligible medical expenses, that money will generally be taxed (plus a penalty if the employee is under 65 years of age).

Difference between HSA and a Flexible Spending Account

You’ll want to keep in mind that a Flexible Spending Account (FSA) is much different than a HSA. Unlike a FSA, the HAS balance rolls over as there is no policy indicating that you must use the funds before year-end. An FSA is much different in that you can use the account for all types of medical expenses, even those nonprescription medicines and accessories, i.e. Band-Aids, gauze, icepacks, Neosporin, Tylenol, allergy medication, PeptoBismol, etc. The downside to an FSA is that you will lose out on the funds put into the account if you don’t use it by a certain date, usually by year-end. Therefore, you are essentially losing part of your income as you may have thousands of dollars left in the account.

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