What is an HSA – And How Do You Use One?

1 - What is an HSA - Header ImageHealth Savings Accounts (HSAs) go hand-in-hand with high-deductible health insurance plans. These days, they’re increasingly common – one study found that nearly 30% of plans fall under the “high deductible” categorization, which means you might be increasingly likely to have one.

So how do these plans (and their HSAs) work, and how can you make the most of them?

Understanding the basics: High-deductible plans

 High-deductible insurance plans require that you pay more out-of-pocket (a higher deductible) before your insurance coverage kicks in. While you may get free or cheap preventive care and greater coverage for children, expenses like prescription drugs and specialist appointments will likely cost you more compared to other plans. The average deductible limit is about $2,300 for individuals and $4,300 for families.

In exchange, your high-deductible plan will likely come with a lower monthly premium and the chance to set aside money in a health savings account.

What’s an HSA?

 You can think of HSA accounts as a kind of healthcare IRA. These accounts take tax-free contributions, allow for tax-free distributions for qualified medical expenses, and have limits on the amount you can contribute each year. If you use the money for non-medical expenses before age 65, you’ll be subject to taxes and a penalty.

A quick summary of HSA features and restrictions:

  • Tax-free contributions of up to $3,350 for an individual and $6,750 for families. If you’re over 55, you can add a $1,000 catch-up contribution. The amount you contribute to an HSA is deductible from your taxable income.
  • Tax-free distributions for qualified medical expenses for you and your immediate family.
  • Money can stay in your account and potentially grow indefinitely.
  • Once you reach age 65, you can use the money for non-medical expenses, though any distributions will be subject to income tax (non-medical distributions before this time are subject to both income tax and a 20% penalty).

Because of their tax benefits, HSA accounts can essentially help you reduce the cost of medical care. This also makes the HSA an effective savings account – while the money can only be used for medical expenses until age 65, it’s completely tax-free. This means you can take full advantage of the benefits of compound interest, at least when it comes to healthcare.

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So what are the drawbacks?

One of the ideas behind high-deductible plans and HSAs is that when consumers are empowered to spend cash on medical costs, they’ll have more incentives to find lower-cost alternatives and make the best decisions possible for their families.

Unfortunately, that doesn’t mean it always works out this way. For many people, the specter of high deductibles is one more reason to avoid medical care – even when it’s needed.

A Commonwealth Fund study found that 40% of patients with deductibles that were over 5% of their incomes avoided getting medical care altogether because of the cost. That included basics like preventative screenings.

Another study, by Families USA, found that nearly 30% of patients with individual deductibles of over $1,500 per year avoided getting care due to the cost.

In other words, these plans can be empowering – but the promise of a lower premium comes with the potential for far greater outlays when you actually goes to the doctor. This can be frightening, particularly for those who are already struggling to keep a handle on their medical bills.

Making the most of it

However, there are ways to make the most of your high-deductible plan and HSA.

The key is to take an active role in directing and understanding your healthcare options. This is a greater investment in time, to be sure, but it can also help you to get the care you need at a more competitive cost.

Your first port of call? Your plan document.

A large proportion of high-deductible plans do offer free screening tests and cheaper rates for other routine services. Unfortunately, 20% of patients avoid those tests because they don’t know that!

Find out what your plan includes and be sure to really take advantage of your free benefits. Keeping on top of your health can help you avoid a number of preventative illnesses, and catching problems early on can make them much cheaper to treat.

Second: Talk to your doctor.

Doctors aren’t just helpful when it comes to medical questions. Your doctor can help provide you with a framework for comparing the cost and benefit of different services, and he or she can give you advice on how to analyze the merits of different healthcare providers. For example, if you need surgery, your doctor may be able to help you ask the right questions to get the care you need.

Similarly, your insurance company may offer an online tool for cost comparisons or a call center staffed with people who can help you get a firm handle on the various options that are available to you. Choosing between procedures and providers can be overwhelming – whether it’s your doctor or your insurer, don’t hesitate to reach out for help.

Learn to be a smart shopper.

Consumer Reports advises focusing your healthcare shopping on both price and quality – they don’t always go hand in hand! Again, your doctor can give you tips on how to discern whether a particular provider is going to give you what you need – and whether a higher cost is truly worth it.

Use your HSA.

If you can, use the savings on your high-deductible premium to help fund an HSA. Even if it’s just a little bit, this is a great way to set money aside for both small procedures and emergencies. If you get an annual bonus or a tax refund, strongly consider using at least part of it to help cover any possible obligations up to your deductible limit.

Beyond that, you can use your HSA as, essentially, a second retirement account. If you ever need access to costly medical care, your HSA will be there, and if you don’t it will offer tax-advantaged growth until you reach retirement. This can be especially powerful if you’ve already maxed out your other retirement savings vehicles.

Personal finance goes far beyond healthcare – what about raising kids?

Medical expenses are a huge concern for many families, but they’re also just one of many priorities. If you have kids, you’re probably also trying to balance giving them the opportunities and experiences they deserve with managing your family’s bottom line.

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Let Us Help!

We can discuss this topic and more at a complimentary appointment. As a bay area retirement financial advisor, we can give you a review and make suggestions based on your retirement objectives.

Important disclosures

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC.

To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.

Neither diversification nor asset allocation can ensure a profit or prevention of loss in times of declining values. NPC does not render tax advice.

Information for this article was compiled from the following resources:
http://www.consumerreports.org/health-insurance/high-deductible-health-plan/
http://www.cnbc.com/2016/06/15/health-savings-accounts-a-second-retirement-plan.html
https://www.irs.gov/publications/p969/ar02.html
http://www.pwc.com/us/touchstone2016

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