A Health Savings Account is a type of consumer-directed healthcare plan (CDHP), made up of two components: a high deductible health plan (HDHP), and a tax-advantaged personal savings account. The high deductible allows for lower monthly premium levels, and the money saved on premiums can be placed into an interest-earning savings account, counting as an income tax deduction.
How does it work?
An HSA acts as any other savings account would: the money you deposit into the account can be withdrawn at any time, and must be used to pay for medical expenses that are not covered by your high deductible health plan. These include out-of-pocket expenses, such as your deductible, copayments, coinsurance, dental and vision care, and prescriptions. In addition, you can use this tax-advantaged money to fund your spouse and dependents’ health costs– even if they are not covered by your high deductible health plan.
Who can use a Health Savings Account?
First of all, in order to open an HSA, you must be subscribed to a high deductible health plan. The threshold amount to qualify as high-deductible varies by year. In 2018, the minimum qualifying amount is $1,350 for individuals and $2,700 for plans covering two or more. Restrictions for opening an HSA account include ineligibility for Medicare and Medicaid patients, as well as those who are listed as someone’s dependent on a tax return.
Contributing to an HSA
An annual limit is placed on the maximum amount that can be contributed to an HSA. In 2018, the limit is $3,450 for an individual plan, and $6,900 for a plan that covers more than one person. Contributions to an HSA can be made in several ways. The most common is through a payroll deduction, where you can opt to have contributions automatically deducted from your paycheck and placed in your HSA. Additionally, you can deposit money into an HSA yourself, by transferring funds from a savings or checking account. Finally, your employer may also be able to make contributions through a cafeteria plan, which would be deducted from your gross income.
Another advantage of an HSA is its portability: it exists independent of one’s employer or work status. If you leave the workforce or switch employers, you can still keep your HSA. Also, if you leave your high-deductible health plan, you can keep your HSA and spend and save the money already in it– although new funds cannot be put into the account.
The HSA is the newest form of CDHP, and was intentionally designed to improve upon limitations of earlier personal health savings accounts, like the FSA and HRA. An amendment to the Internal Revenue Code in 2003 allowed for the income tax deduction of HSA contributions. Other innovations of the HSA model include: removal of the “use it or lose it” policy (thereby allowing HSA funds to be rolled over from year to year), the ability to earn interest, account portability, funding by employers and employees, and employee ownership of the account. A final provision is that you are allowed to withdraw your unused HSA funds at age 65.