What is a Health Savings Account

by | May 6, 2020 | Benefits

Update: Health Savings Accounts are an important tool for helping employees manage healthcare costs. We’ve updated this 2016 post to include the latest information on HSA’s, including details on using HSA’s to pay for COVID-19 testing and care. Learn more about how HealthJoy is responding to the coronavirus.

A Health Savings Account (HSA) is a medical savings account available in the US. It offers tax benefits but also comes with restrictions. As health care costs have consistently risen over the last decade, it’s become even more important to focus on curbing costs and encouraging smart healthcare consumer behavior.

In response to rising costs, health insurance companies have worked to create high-quality plan options at affordable prices. This process has changed the health insurance marketplace considerably. We’ve seen the emergence of PPOs, HMOs, and other types of managed care options, meant to steer consumers to certain doctors or hospitals with the promise of reduced claim costs. However, there was a point in time where the major savings for these types of plans flatlined. To keep health insurance affordable, companies began shifting the out-of-pocket risks to consumers.

That’s where Qualified High Deductible Health Plans (HDHP) came in. They were created to give consumers the option to choose a plan with a higher deductible and a greater out-of-pocket maximum. Unlike most other types of plans, there is generally no first-dollar coverage, such as prescription or office copays, on an HDHP plan. The entire deductible must be met before the plan pays on a claim. For the consumer, the tradeoff in having lower premiums is taking on additional out-of-pocket risk.

Health Savings Accounts History

In 2003, Health Savings Accounts (HSA’s) debuted as a way to support individuals on HDHP plans. These accounts allow people to save money in case they need to pay higher out-of-pocket expenses for future medical expenses. The concept is quite simple. After setting up a health savings account at a bank or other financial institution, the consumer is able to put money into the account on a pre-tax basis to use at a later date for medical claims that aren’t paid for by their health insurance plan. An HSA contribution is tax-free as long as it’s used only for acceptable medical expenses.

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The health savings account is owned by the consumer. Whether they are insured on an employer-sponsored HDHP or on an individual basis, the account stays with them no matter their employment circumstances. For those who don’t expect to incur a lot of medical expenses, the HSA is a great investment in the future. They can contribute up to an approved limit every year they are insured on an HDHP. Standard health insurance plans are not eligible for health savings accounts, but the account funds contributed while they were insured by an HDHP remain available for qualified medical expenses in the future. That means that consumers could even use funds contributed in their 20’s to pay for medical expenses after retirement.

Who is eligible for a Health Savings Account?

It’s important to note that not everyone that is enrolled on an HDHP is eligible to have a health savings account. Because there are tax benefits included in having a health savings account, there are specific rules that must be met. The following situations allow for a health savings account:

  • Being enrolled in an HDHP plan and not having any other coverage such as a secondary spouse’s plan. If you have dual coverage on a spouse’s plan you are ineligible for a health savings account.
  • Not enrolled in Medicare. Those enrolled in Medicare are ineligible.
  • Not receiving VA or Indian health service benefits in the last three months.
  • Not covered by your own or your spouse’s flexible spending account (FSA). Many employers offer their employees the option to enroll in a flexible spending account where they can have money taken out of their paycheck pre-tax and put into the account to pay for medical expenses. This fund is different than a health savings account.

Coronavirus and Health Savings Accounts

The COVID-19 pandemic has created additional questions around HSAs and care coverage, especially since HDHP’s might typically require consumers to cover the costs of this care up to a deductible amount. Several major insurance providers, Medicare, and Medicaid have pledged to cover copays, coinsurance, and deductibles for coronavirus testing and COVID-19 treatment.

Those who still need to pay these expenses can use their HSA funds to do so, thanks to provisions in the CARES Act. The same act specified that over-the-counter drugs like aspirin, allergy medication, and more can be paid for using HSA funds, even without a prescription. Finally, the CARES Act specified that HDHP’s can cover telehealth even before someone has met their deductible without jeopardizing that plan’s qualified status. Many insurance providers are waiving fees for telemedicine services during this time, as well.

What are the Health Savings Account Contribution Limits for 2020?

The contribution limits for HSA’s have risen several times since 2003, so it’s important to consult with your tax professional before making a contribution. In 2020, individuals can contribute $3,550, and families can contribute $7,100 to a tax-free HSA in 2020.

Health savings accounts can be a valuable financial tool for those looking to supplement a high deductible health plan and ensure that they have the funds set aside to pay their future out-of-pocket expenses. It is important to understand the tax benefits and implications before enrolling in a health savings account to ensure that you are meeting all requirements.

For healthy consumers looking for a plan that provides catastrophic coverage while building a savings account to cover future expenses, a health savings account can be the perfect option.

Are you an employer offering an HSA to employees? Help them see all their benefits, and even their HSA balance, in a single benefits wallet. Schedule a HealthJoy demo today to see what’s possible.

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