What we’ll cover:
The math behind choosing a health insurance plan that fits your needs can be complicated, so our advice on that front is talk to experts and friends, and also assess your current needs to make that decision.
Our focus, and where we come in, is explaining how a Health Savings Account works.
Word of caution – we’re talking only about HSAs here, not HRAs (Health Reimbursement Arrangements) or FSAs (Flexible Spending Accounts) which work a little differently.
You need to meet these requirements to be able to fund a health savings account:
A lot of rules (we know).
A Health Savings Account is a place you can park money and use to pay for qualified medical expenses, as long as you’re covered by an HDHP. While money in an HSA earns interest, it’s different from your typical savings account and it’s also different from a catch-all emergency fund. Here are some key highlights:
We get it, health expenses can sometimes be emergency expenses. But there are a few differences between having money in an account “for emergencies” and having an HSA that’s meant only for medical expenses and that has its own IRS category.
If you’re contributing money to your HSA, you won’t pay federal taxes on the interest, unlike the interest you earn with a traditional savings account or a certificate of deposit.
Depending on how it’s funded, there could be an additional benefit: If the money you contribute to an HSA is taken out of your paycheck before taxes, this could lower your taxable income. If you fund an HSA using after-tax dollars, you may be able to deduct these contributions on your tax returns, but it’s a good idea to double-check with a tax professional to see if this applies.
Having different buckets for different expenses is a tenet of budgeting and long-term financial planning (hello, retirement!).
Because you can only use the money tax-free for qualified medical expenses, when you contribute money to an HSA, you’re creating a pool of funds for this specific type of expense.
The IRS outlines what is considered a qualified medical expense. Their most recent list is from 2018 (as we write this) and your insurer will also be able to guide you about what you can use the money for. In general, eligible expenses include the medical bills you pay before reaching your deductible, co-pays, co-insurance and some over-the-counter medicines.
Important note: Congress temporarily modified some of the restrictions around when you can use HSA funds as part of the CARES Act. We've addressed some of the changes regarding HSA and HDHP rules, but check with HR and your HSA provider for the last word on how these changes work.
If you’re single without dependents in 2020, your HDHP deductible will be at least $1,400. If your plan is for a family, your deductible will be at least $2,800.
HSAs work a lot like typical savings accounts – you deposit money and it earns interest.
There are two ways to fund your HSA:
In 2020, you’ll be able to deposit up to $3,550 to your HSA if the policy is just for you. If the policy covers your family, you’ll be able to deposit up to $7,100 (and an additional $1,000 if you’re 55 or older). Employers sometimes contribute to HSAs, which can increase your savings.
For one, the money is always yours. If you change jobs, if you change insurers or if you retire, it doesn’t change things: the money you’ve contributed travels with you.
Another benefit is that there’s no deadline to use the money. You’re not required to use the money in your HSA by a certain date or age.
After you turn 65, you can use the money in your HSA to pay your health insurance premiums.
Before age 65, you may be able to use your HSA to pay your health insurance premiums, depending on your circumstances. Two situations include:
As long as you’re covered by an HDHP, you can add money to your HSA. If you’re covered by a partner’s plan, you can contribute to your HSA as long as their plan is also a HDHP.
If you switch to a health care plan that is not an HDHP, you get to keep the money you’ve saved in your health savings account. You can also continue to spend the money on qualified medical expenses. The only real change is that you won’t be able to add money to your HSA if your new plan is not an HDHP.
Your original contributions will be taxed as income, and you can get socked with an additional 20% tax if you use the money for something that’s not on the IRS’ list of approved medical uses if you’re under 65.
Over 65? You won’t have to pay the additional 20% tax, but your contributions could be taxed as income if you use the money for something that’s not a qualified medical expense.
Even if the income tax isn’t a deal-breaker when you’re 65 or older, you still may want to hold off on raiding your HSA for other purposes.
As Gallup pointed out in a summary of its findings from their poll conducted on healthcare costs in April 2019: About 7.5 million seniors said they couldn’t afford their prescriptions, and 80% of the prescriptions they could not afford were for somewhat to very serious health conditions.
This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.