Whether you’re changing jobs or exploring health insurance plans during open enrollment, it’s often difficult to decide which option is right for you and your situation. If you’re offered a high deductible health plan, the lower insurance premiums may initially look appealing to your budget. But you might be worried about this option when you see the higher deductible amounts. To supplement this type of plan, a Health Savings Account (HSA) could help.
As medical costs in the U.S. continue to increase, it’s important to have a health insurance plan that works for your budget and needs. In 2022, a record-high of 38 percent of adults put off medical care due to the cost.1 Of those who delayed treatment, 27 percent of individuals delayed treatment for a very or somewhat serious condition.1
Don’t let money be the reason to put off the healthcare you need. Check out how a savings option like an HSA can help you pay for qualified medical costs without impacting your monthly budget.
What is an HSA?
A Health Savings Account is a separate savings account where funds are specifically used for medical expenses. HSAs are available to individuals if they have a high-deductible health plan (HDHP) to help supplement any qualified medical costs not covered by their plan. There are many reasons people choose a HDHP, including being self-employed, only having limited health insurance options offered by an employer, or for those looking for a way to pay lower monthly insurance premiums.
You may qualify for an HSA if you2:
- Are covered under a qualified high-deductible health plan
- Have no other health insurance coverage
- Are not enrolled in Medicare
- Are not claimed as a dependent on someone else’s tax return
Employers often offer HSA plans and sometimes contribute additional funds to the account. You can also open an HSA on your own through many financial institutions. At Lake Trust, we offer our members HSA plans through our partners at HealthEquity3.
What are the advantages of an HSA?
HSAs not only offer a way to keep your medical expenses separate from your monthly budget, but they also offer some tax advantages. Contributions (deposits) to an HSA account are made with pre-tax dollars, meaning your taxable income may decrease.4 In addition, withdrawals from HSA accounts are not taxed if you use the funds for qualified medical expenses, like prescription drugs, or medical, dental, and vision care.2
Another great feature of an HSA is the ability to invest funds in the account to grow tax-free over time.2 Funds in an HSA roll over each year, so if you start an HSA at a young age and make regular contributions, it could help you save for future medical expenses or even retirement.2
For these reasons, HSAs are often called triple tax-advantaged accounts.
What are the disadvantages of an HSA?
As with all savings accounts, you must be disciplined about making regular deposits to an HSA. If you lower your contributions too much or quit adding to the account, you could run out of money to cover your medical expenses. If this happens, you’re responsible for covering any medical expenses out-of-pocket.
Another potential disadvantage of an HSA is the amount of record-keeping it requires. When it’s time to file your taxes, you’re required to provide receipts to prove how you spent the funds in your HSA. It’s also important to verify that costs qualify as a medical expense before you use the funds in your HSA. You can visit HealthEquity website3 to see a list of qualified medical expenses designated by the IRS.
If you don’t have a record of how you used your HSA funds, the distributions (or funds taken out of the account) may be subject to income taxes AND an additional 20 percent tax penalty.2
What’s the difference between an HSA and an FSA?
A Flexible Spending Account (FSA) is another popular option to save for medical expenses. These accounts are only offered through employers, so you can’t open an FSA on your own. Since FSAs are only available through an employer, you forfeit access to the account if you ever leave your job.5 With an HSA, however, the account is yours and you can continue to access the account if you ever change jobs.5
Employees can elect to open an FSA regardless of whether they have a HDHP or not. If you recall from earlier, you can only open an HSA if you have coverage under a qualified HDHP.
Another advantage HSAs have over FSAs is that the balance in the account rolls over each year. FSAs have a “use it or lose it” rule attached to them, meaning you’ll forfeit any funds left in the account at the end of the year. HSAs also have higher contribution limits than FSAs, and you can change your contribution amount at any time.5 With an FSA, you’ll set your contribution limit at the start of the year, and you cannot change it until open enrollment rolls around again.
Families with children often consider FSAs because they can use the funds for expenses like childcare if the account is set up as a Dependent Care FSA.5 So, this is a nice option if you’re looking for a way to save for daycare or other childcare expenses in advance.
Who can I talk to about opening an HSA?
If you have questions about Health Savings Accounts and need some guidance, contact our Financial Life Planning team. They can help you consider the costs and determine if this is the right savings option for you. Or, if you’re interested in opening an HSA on your own, visit the savings page of our website to learn more about HSAs through HealthEquity.
Whether you’re currently in open enrollment or preparing for the next season, it’s beneficial to your health and your finances to consider all your insurance and medical savings options. Choosing a savings plan may be difficult, but our team is here to help. You’re never alone on your financial decisions.