An HSA, or Health Savings Account, is a particular type of account used to handle medical expenses. It is typically paired with a high-deductible health plan and used to pay for medical expenses before reaching the deductible. The concept is similar to an IRA in that it is an officially recognized account by the IRS that comes with various tax benefits. Whether you are using your HSA to invest or to cover health expenses, here are some helpful tips.
1. Begin Funding Your HSA Right Away
If you have a high-deductible health plan, these plans can require policyholders to pay thousands of dollars out-of-pocket before their health insurance kicks in. This qualification is by design to reduce monthly premiums.
To make this burden easier for policyholders to bear, the IRS allows people with qualified high-deductible plans to open a Health Savings Account and pay for out-of-pocket expenses with tax-free money. The funds must be deposited into the HSA account before being withdrawn to cover medical costs to qualify for the tax break.
You cannot fund your HSA after a medical incident occurs and still get the tax break, so it is essential to keep the account funded so that you can maximize the tax benefits.
2. Your HSA Can Function as an Investment Account
Some HSAs function as simple savings accounts with a little bit of interest, while others allow you to invest your deposited funds in things like mutual funds, just as you could inside of an IRA or 401(k).
To invest money from an HSA, you may be required to keep a certain amount available (that is, un-invested in securities) to cover medical out-of-pocket medical expenses. The amount that must be kept accessible is known as the investment threshold.
Now, if you have continually occurring medical expenses, it may be difficult or impossible for you to maintain that threshold. However, if you are simply using the account to cover potential or very occasional costs, then investing the money that’s in your HSA could be beneficial.
Lastly, if you make a lot of money, you may be able to cover short-term out-of-pocket expenses directly rather than withdrawing them from your HSA. This approach allows you to leave funds in your HSA invested longer, which will enable them to grow.
3. Know Your Plan’s Limitations
Thanks to the Affordable Care Act, even high-deductible plans are required by law to provide free preventive services to policyholders. These preventive services can include certain types of cancer screenings, immunizations, and some child checkups.
The risk here occurs when you go in for preventive care and then ask about some unrelated health concerns. The doctor can then bill your plan for that separate service, and you end up having to pay the bill out of your HSA. Your high-deductible policy does not cover those other unrelated services, and so you are effectively paying for them out-of-pocket, which is not ideal.
The goal is to take advantage of all the free care provided by your plan. At the same time, don’t stray outside what is covered into the territory of out-of-pocket expenses.
4. Make Sure Your Doctor Bills Your Insurance Company
This concept may seem counterintuitive, but it is significant. When you receive medical care below the amount of your deductible on a high-deductible plan, you cover those expenses out-of-pocket. However, for your medical expenses to count against your deductible (so the insurance will kick in once they exceed that amount), they need to be billed to your health insurance company and not to you directly.
Furthermore, make sure you are billed your insurer’s negotiated rate rather than the possibly higher rate charged to people who don’t have medical insurance and are paying cash.
5. Funds Deposited Into an HSA Will Never Disappear
Some people think that an HSA works the same way a flexible spending account does, in that funds must be spent each year or disappear at the end of the year. This is not the case with HSAs. You can leave money that you deposit in an HSA indefinitely, even if you eventually switch from your high-deductible health insurance plan.
Because HSA accounts can also be used as investment accounts and are tax-free, it makes sense to avoid using or removing funds deposited in them for as long as possible. This benefit is why some people recommend using resources outside your HSA to cover out-of-pocket medical expenses if you can afford to do so. This way, the funds that remain in the HSA can continue to grow and earn interest and dividends.
Even if you pay for out-of-pocket expenses using non-HSA funds, it is easy to get reimbursed for them later from the HSA. Most providers typically require that you show the receipts to prove that you are using your HSA funds to cover medical expenses. Thanks to today’s technologically advanced companies, this can often be done in seconds through a simple mobile phone app.
If you need to withdraw the funds from your HSA before age 65, you will need to pay regular income taxes on the funds withdrawn, but no more than you would have paid had the money never been deposited and stored in the HSA. Overall, there are many benefits to leaving deposited funds in the HSA for as long as possible.
These tips can help you manage your HSA and get the most out of the benefits it provides. Do you have any experiences or tips to share with others looking to maximize their HSA? Feel free to share them here in the comments below.