This is page eight of a Health Savings Account Handbook guide. Start with page one to understand all of the ins and outs of Health Savings Accounts (HSAs).
Contents
Overview
As you become more familiar with your HSA-qualified health plan and how to manage your Health Savings Account (HSA), you’ll discover ways to make the most of your healthcare dollars. With strategic contributions to your HSA and other retirement accounts, you can lower your tax liabilities and build financial security for the future, particularly for healthcare costs during retirement. This proactive approach allows you to stretch your HSA funds further and save more money over time.
Saving HSA funds
Redirecting premium savings to your HSA
Opting for a higher deductible often means paying lower monthly premiums. While this might seem daunting, it’s essential to carefully weigh your options. Consider factors like coverage before the deductible kicks in, available networks, and out-of-pocket maximums for each plan. This ensures you make an informed decision about your financial exposure.
Choosing an HSA-qualified health plan could be a smart financial move in the long run. By contributing what you save on lower premiums into your HSA, you can offset the higher deductible. Any contributions from your employer further boost your HSA balance. Unlike some accounts, your HSA can continue to grow year after year.
To put it in perspective, think of car insurance. Policies with a $50 deductible typically have higher premiums than those with a $500 deductible. Similarly, with health coverage, you decide between lower upfront costs and saving for unexpected expenses or higher premiums for more predictable costs. Often, crunching the numbers leads to opting for lower premiums and setting aside funds for unforeseen expenses.
Thinking about coinsurance and copayments
The amount you pay out of pocket, like coinsurance and copayments, impacts your premium costs. Generally, the more you’re responsible for, the lower your premium. For instance, a plan covering 100% of costs after the deductible will likely have a higher premium than one with an 80/20 coinsurance setup (where the plan pays 80% and you pay 20% until reaching your out-of-pocket maximum).
How you manage coinsurance and copayments affects whether you need an HSA, FSA, or HRA and how much you might have to pay after meeting your deductible. It’s worth noting that coinsurance levels often differ for in-network and out-of-network care.
Using an HSA with an HRA or FSA
To contribute to an HSA, you need to be covered by an HSA-qualified health plan without any other disqualifying coverage. For instance, if your employer offers a Health Reimbursement Arrangement (HRA) or a health Flexible Spending Arrangement (FSA) that covers expenses before meeting your deductible, you wouldn’t qualify for an HSA. However, some employers offer HSA-qualified HRAs or FSAs that fill the gap between the deductible and out-of-pocket maximum for HSA owners.
It’s crucial to understand your benefits’ requirements, keep accurate records of expenses, and pay attention to deadlines for reimbursement requests to avoid missing out on benefits.
If you have an HSA-qualified FSA alongside your HSA, discuss your dental and vision needs with providers during open enrollment to estimate costs. Then, consider making contributions to a Limited Purpose FSA (LPFSA) to cover those expenses. Be cautious not to over-contribute to the LPFSA, as unspent funds may be lost at the year’s end.
Using an HSA-qualified FSA or HRA for dental and vision expenses instead of your HSA can help extend your HSA balance. This approach is especially beneficial for those maxing out their HSA contributions.
While you can’t contribute to an HSA if you have a regular Health FSA, you can use an HSA-qualified version of an FSA or HRA, or both, and still contribute to your HSA.
2024 Contribution Limits for HSAs and FSAs
| Individual | Family | Catch-up contribution for >55-year-olds |
Use-or-lose | |
|---|---|---|---|---|
| HSA | $4,150 | $8,300 | $1,000 | No |
| HSA-qualified FSA | $3,200 | $3,200 | N/A | Sometimes. Depends on employer design |
| HSA-qualified HRA | Employer-funded | Depends on employer design |
Using gap coverage
As explained earlier on page 4, HSA regulations permit certain types of insurance to be used alongside your HSA-qualified health plan.
These additional policies can provide a safety net to offset the risk associated with a higher deductible while still allowing you to contribute to your HSA.
These policies include homeowner’s insurance, car insurance, dental and vision care plans, accidental injury insurance, workers’ compensation benefits, hospital indemnity plans (which provide a fixed daily amount during hospitalization), and specific disease policies that offer a fixed payout for a designated illness.
By allowing these additional plans, HSA regulations aim to safeguard your HSA balance and offer protection against unexpected out-of-pocket expenses.
Deciding how much to contribute
It’s a smart move to contribute as much as you can to your HSA within the limits set by the law and your family’s budget. HSAs offer superior tax advantages compared to other savings plans like traditional IRAs, 401(k)s, and Roth IRAs.
Here’s why HSAs stand out:
- Tax-deductible contributions: You can deduct your HSA contributions from your taxable income, reducing your overall tax burden.
- Tax-free growth: Any interest or investment growth within your HSA is tax-free, allowing your savings to grow faster.
- Tax-free withdrawals: You can use the money in your HSA to pay for qualified medical expenses without owing federal income tax, and often state income tax as well.
- Long-term ownership: Unlike other health accounts such as FSAs or HRAs, your HSA funds belong to you indefinitely. You can even use the money for non-health-related expenses after age 65, although you’ll pay income tax on withdrawals.
If you’re on a tight budget and can’t max out your HSA contributions right away, don’t worry. The IRS allows you to contribute to your HSA beyond the end of the year, up until the tax filing deadline, while still enjoying tax benefits.
Strategies for funding HSAs and 401(k)s
Many employers now offer both HSAs for healthcare security and 401(k)s for retirement security. It’s important for employees to understand the unique benefits of each account and how to maximize their savings potential by allocating contributions wisely.
Here are some key points to consider:
- Triple-tax advantage of HSAs: HSAs offer a unique triple-tax advantage. Contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are tax-free. Additionally, after age 65, you can use an HSA for non-healthcare spending without penalty, although you’ll pay income tax on withdrawals, similar to traditional IRAs and other retirement accounts.
- Employer contributions: Determine if your employer contributes to either your HSA or other retirement accounts, and understand the level of their contribution. Make sure to contribute enough to receive the full employer match, as this is essentially free money.
- Budget considerations: Evaluate your overall budget and determine how much you can collectively contribute to all your retirement accounts.
Based on these factors, consider the following steps:
- Contribute enough to your HSA and other retirement accounts to receive any employer contributions and matching funds.
- Aim to maximize your HSA contributions up to the allowable annual maximum, including catch-up contributions if you qualify.
- Additionally, contribute to your 401(k) up to the annual maximum, keeping in mind that HSAs offer more tax advantages than 401(k) and Roth accounts.
To further boost your savings, consider paying your medical expenses out of pocket if you can afford to, allowing your HSA funds to grow.
Lastly, it’s always a good idea to discuss your funding strategy with your accountant or tax professional to ensure it aligns with your financial goals.
Using deductions to payroll
If you anticipate a significant medical expense in the upcoming year, there are steps you can take to prepare and manage your HSA funds effectively:
- Increase payroll deductions: If your employer offers payroll deductions for your HSA contributions, consider increasing them to build up your HSA balance. This can help you cover larger medical expenses when they arise.
- Fully fund your HSA: If possible, contribute the maximum amount allowed to your HSA at the beginning of the year. This ensures that you have enough funds available to cover any unexpected medical costs throughout the year.
- Review HSA terms: Check the terms of your HSA to see if there is an acceleration feature that allows you to access funds earlier in the year than you deposited. This can be useful if you need to cover a large medical expense before you’ve had a chance to fully fund your HSA.
Example: Funding an HSA early in the year The Karen family is expecting their second child in July. The plan year for their HSA-qualified health plan will begin six months earlier, on January 1, 2024. They have family coverage with a $5,000 deductible and no embedded deductible. Their plan has maternity coverage and no coinsurance once they meet their deductible. Expecting out-of-pocket expenses in July associated with the birth of their child, they increase their HSA contributions to $800 per month, so that by July 1, they will have contributed $4,800 in their HSA for the year. For the 2024 tax year, Mr. and Mrs. Karen can contribute up to $8,300 to their account, meaning they can still contribute $3,500 over the next six months if they remain eligible to contribute to the HSA for the entire year. By the time of the projected due date, they will have nearly enough money in their HSA to satisfy their entire $5,000 deductible. Their HSA-qualified health plan will fully pay all in-network costs that exceed $5,000.
Taking care when shopping
You’ve got lots of ways to find deals and lower prices on your meds and other health stuff. You can look through what your health insurance offers and also search online.
Make sure to check out sites that tell you about hospital ratings and how much treatments cost. If you have a Health Savings Account (HSA), the website where you manage it might have some links to help you compare prices.
You could also think about using things at home instead of some meds or supplies.
Plus, there are more and more tools popping up that let you see prices if you take the time to look for them. Your HSA person or health plan might have some tools to help you compare prices, too.
Examples
Once you get the hang of what your health plan with a Health Savings Account (HSA) covers, like what you gotta pay before insurance kicks in, what you pay, and what you have to pay on your own, you can really make the most of your HSA.
Here are some examples of how an HSA can lower how much you pay each month for health insurance and teach you how to be a smart health care shopper. These examples show you how to get all you can from your HSA by figuring out which HSA health plan works best for you and how much money you should put into your HSA.
To make it easier to compare, in these examples, the person doesn’t put any money into their HSA.
Example: Comparison shopping Haley, a 45-year-old married mother of three, lives with insulin-dependent diabetes. Haley’s husband recently left a job that offered health benefits through a lower-deductible, traditional plan. His new employer offers an HSA-qualified health plan. With her previous health plan, she had a reasonable copay for insulin, so she didn’t consider checking for a better deal elsewhere. As she started using her new plan, she realized that she received comparable care to what she had before and could put money in her own pocket when she shopped around. By asking questions about lab work, blood tests, and examinations, she learned how to save money by switching to generic drugs and buying a less expensive blood glucose monitor and test strips. In fact, she started buying a hemoglobin A1c (HbA1c) test from the pharmacy, which cost about half of what she paid when the lab tested her blood. She also learned to watch for coupons and rebates.
Example: HSA-qualified health plan vs. PPO with chronic disease Chris and Alexa, a middle-aged married couple, begin to need care for chronic conditions. During his employer’s open enrollment period for 2022 benefits, Chris uses his and Alexa’s medical history from 2021 to compare benefit options. In 2021, Chris and Alexa took advantage of free preventive care screenings through their health plan. They also took medications for some mild chronic illnesses and had one urgent care visit during the year. Name: Chris Age: 58 Health: One chronic condition with two prescriptions Healthcare utilization: Regular doctor and preventive visits, One urgent care visit for cut hand. Name: Alexa Age: 57 Health: Pre-diabetic, controlled by diet Healthcare utilization: Regular doctor and preventive visits. To compare plans, Chris totals the premiums, medical expenses, and employer contributions to the HSA. Even though he does not typically meet his HSA-qualified health plan deductible and had to pay for healthcare expenses out of his HSA (and out of his own pocket after depleting the HSA), he still pays $1,583 less under the HSA-qualified health plan. Chris' PPO plan Employer HSA contributions: $0 Employee contribution to healthcare premiums $7,740 ($645 x 12 months) Total provider visits (Copays) $115 Total prescriptions (Copays) $140 Money out subtotal $6,272 Total money out $6,272 HSA balance remaining $0 Alexa's HSA-qualified plan Employer HSA contributions: $987 ($82.25 x 12 months) Employee contribution to healthcare premiums $4,572 ($381 x 12 month) Total provider visits (from HSA) $895 Total prescriptions (from HSA) $722 Money out subtotal $6,189 Less employer HSA contribution -$1,500 Total money out $4,689 Difference in out-of-pocket expenditures $1,583 saved on HSA
Example: PPO with good health VS HSA-qualified health plan Layna knows the importance of health insurance and good habits. She watches what she eats and gets enough exercise and sleep. She has a relatively low income and watches her budget carefully. Age: 35 Health: Excellent Medications: One generic antibiotic Healthcare utilization: Two doctor visits: annual checkup, strep throat Like Chris, Layna compares her two plan options using her expenses from 2021. Because she worries about the higher deductible in the HSA-qualified health plan, she finds the $0 deductible in the PPO very attractive. Even though she enjoys good health, she does not think she can afford unanticipated medical expenses because she largely lives paycheck to paycheck. She also notices that the out-of-pocket maximum for the HSA-qualified health plan is $3,000, compared to $2,000 from the PPO plan. Her employer contributes $750 to her HSA at the beginning of the plan year, but she does not see much of an impact from that at first. Her co-worker encourages her to do the math. Premiums and contributions PPO plan Out-of-pocket maximum: $2,000 Annual premium contributions: $2,004 ($85 x 12 months) HSA-qualified health plan Deductible: $1,500 Out-of-pocket maximum: $3,000 Annual premium contributions: $1,164 ($97 x 12 months) Employer HSA contributions: $750 ($62.50 x 12 months) Both of Layna’s insurance plan choices would cover her annual checkup as a preventive benefit. Provider visits PPO plan Annual preventive exam 100% covered $100 doctor visit $25 copay $25 Total office visit costs $25 HSA-qualified health plan Annual preventive exam 100% covered $100 doctor visit Pays from HSA $100 Total office visit costs $100 Layna purchased only one prescription in 2021: an antibiotic (generic instead of name brand) to treat strep throat. Prescriptions PPO plan Antibiotic ($152.16 or $31 for generic) $10 copay $10 Total prescriptions $10 HSA-qualified health plan Antibiotic ($152.16 or $31 for generic) $31 Total prescriptions $31 Everything comes into perspective a contribution to her HSA, she saves money with an HSA-qualified health plan. Though worried about the higher deductible and out-of-pocket maximum, she finishes the year with a positive balance in her HSA (more than $600). Even with a $0 deductible, she would have paid at least $700 more with the PPO plan compared to the HSA-qualified plan when she factors in monthly premiums and copay costs. PPO plan Annual premium contributions $167 x 12 months $2,004 otal office visit costs Copays $25 Total prescriptions Copays $10 Total money out $2,039 HSA-qualified health plan Employer HSA contributions $62.50 x 12 months $750 Annual premium contributions $97 x 12 months $1,164 Total office visit costs Paid from HSA $100 Total prescriptions Paid from HSA $31 Total money out $1,295 Savings $744 HSA balance remaining $619
Example: HSA-qualified health plan with accidental injury VS PPO Dwayne and Lora Feldman have two children. Dwayne works for an electrical contractor and Lora works at a local university. Lauren has better benefits, so she opts for family coverage from her employer. They have two very active girl. One was injured in a bicycle accident in 2021. They have no reason to believe that the girls will become any less adventurous in 2022. Name: Dwayne Age: 36 Health: Excellent Healthcare utilization: Regular doctor and preventive visits Name: Lora Age: 36 Health: Excellent Healthcare utilization: Regular doctor and preventive visits Name: Children Age: 6 and 10 Health: One child required surgery Healthcare utilization: Regular doctor and preventive visits, one ER visit, surgery, and 3-day stay for injury Lora uses the family’s 2021 medical expenses as a guide to compare her two 2022 plan options: a PPO plan with a relatively low deductible and out-of-pocket maximum and an HSA-qualified plan with a much higher deductible and out-of-pocket limit, but no employee-paid premium. Her company will also contribute to an HSA, if she opens one. Premiums and contributions PPO plan Deductible $250 Maximum out-of-pocket limit $2,500 Coinsurance 20% Annual premium contributions $400 x 12 months $4,800 HSA-qualified health plan Deductible $3,000 Maximum out-of-pocket limit $5,000 Coinsurance 20% Employer HSA contributions $150 x 12 months $1,800 The hospital expenses for the surgery far exceed the out-of-pocket maximum for both plans, so she only uses the out-of-pocket amounts to compare the actual costs of each plan. Provider visits PPO plan Two annual preventive exams Preventive 100% covered $0 Emergency room, surgery, labs, prescriptions for bicycle accident All expenses above out-of-pocket max. paid 100% by health plan $19,735 Out-of-pocket maximum Entire amount paid out-of-pocket $2,500 HSA-qualified health plan Two annual preventive exams Preventive 100% covered $0 Emergency room, surgery, labs, prescriptions for bicycle accident All expenses above out-of-pocket max. paid 100% by health plan $19,735 Out-of-pocket maximum Entire amount paid out-of-pocket $5,000 When Lora compares money in versus money out, she sees that the HSA-qualified health plan option provides greater protection against out-of-pocket expenses. PPO plan Annual premiums -$400 x 12 months -$4,800 Provider costs -$2,500 Total money out -$7,300 HSA-qualified health plan Employer HSA contributions $150 x 12 months $1,800 Provider costs -$5,000 Total money out $3,200 Savings $4,100 With this plan design, Lora saves $4,100 by choosing the HSA-qualified health plan, even with a large, unforeseen expense. She can save even more if she uses her savings to make additional pre-tax contributions to her HSA.
Spend Less, Save More
You can grow the money in your Health Savings Account (HSA) by spending less and also by earning more money on what’s in the account.
Retail pricing
Many healthcare providers work with different insurance plans and might not be able to tell you exactly how much you’ll have to pay for a service. It’s a good idea to talk to your insurance company to understand the costs or to find out how to get the best price when you see your doctor.
Early HSA contributions
The rules for Health Savings Accounts (HSAs) let both you and your boss put money into your HSA in a way that works best for you. You can add money whenever it’s convenient, but make sure the total amount for the year doesn’t go over the set limit.
If you get a bill that’s more than what you have in your HSA, you can pay it with other money you have and then get the money back from your HSA later, once there’s enough in it. The organization managing your HSA will give you the details on how to get reimbursed.
Repay Duplicate Reimbursements to Your HSA
If you use your Health Savings Account (HSA) to pay for something and then get that money back from your insurance or a refund from the healthcare provider because they charged you less, you should give the refunded money back to the HSA manager right away.
If you don’t return the extra money, you’ll have to pay taxes on it and possibly a fine to the IRS. This rule also applies if you get money back from a healthcare provider because you paid too much.
If you accidentally take money out of your HSA, you can put it back without getting in trouble, as long as you do it before the deadline for filing taxes. But, your HSA manager has to allow it, and you need to show proof that the withdrawal was a mistake.
Investing HSA funds
By putting in the max amount you’re allowed to each year, handling your money wisely, and always looking for the best deals (like comparing drug prices at different pharmacies or sticking with doctors and hospitals that your insurance covers), your Health Savings Account (HSA) can really start to grow over time.
You can also try to make more money with your HSA by investing it. This comes with more risk, but if you’ve got more than a certain amount in your account (often around $1,000 to $2,000, depending on your HSA’s rules), you can invest the extra. You might be able to put your money into things like mutual funds or stocks.
Your HSA provider will probably have a website where you can manage these investments. And a big plus is that any money you make from these investments won’t be taxed by the federal government as long as you use it for medical expenses that qualify.
Investment choices
You can use your Health Savings Account (HSA) funds to invest in things like annuities, certificates of deposit (CDs), stocks, mutual funds, and bonds, similar to what’s allowed in Individual Retirement Accounts (IRAs).
However, you can’t put your HSA money into life insurance or collectibles like art or antiques. Also, you shouldn’t mix your HSA funds with other assets, unless they’re in a shared trust or investment fund.
The money you earn from these investments won’t be taxed as long as it’s used for qualified medical expenses. But remember, all investments come with risks, including the chance that you might lose the money you put in.
These investments aren’t covered by FDIC or NCUA insurance, which means if the investment doesn’t do well, you won’t be compensated for the loss. This risk is why some people choose not to invest their HSA funds.
If you decide to invest, make sure to read the prospectus for each fund carefully to understand what you’re getting into. The options for where you can invest and the minimum amount you need to start investing can be different depending on who’s holding your HSA, and these details might change from one year to the next.
If you have questions about investing your HSA funds or how it might affect your taxes, it’s a good idea to talk to a financial advisor or check with the IRS.
Using Invested HSA Funds to Cover Qualified Expenses
If you face a big medical bill that’s eligible under your Health Savings Account (HSA) rules, you can pull money from your investments back into your HSA cash balance without any tax penalties.
This move doesn’t count towards your yearly contribution limit because the IRS sees it as a withdrawal for medical expenses, not as adding new money to your account.
Also, if you pick an HSA administrator that doesn’t charge trading fees, you can buy and sell investments within your HSA without any additional costs.
This means you can manage and adjust your investment portfolio as needed without worrying about extra charges eating into your funds.
Summary
To cut down on your medical and retirement expenses out-of-pocket, try out these strategies:
- When it’s time to pick a health plan, take a good look at what you spent on healthcare last year and compare it to the plans you can choose from now. Think about the cost of the monthly premium, any money your job might add to the plan, what taxes you’ll have to pay, your share of costs like copays and coinsurance, your deductible (the amount you pay before insurance starts covering costs), and the maximum you’d have to pay out-of-pocket.
- To get the most out of your taxes and save money faster, think about putting in enough money to get all the matching funds your employer offers, if they offer any. Remember, Health Savings Accounts (HSAs) can give you even bigger tax breaks than 401(k) retirement plans.