What Is a Health Savings Account? Health Savings Accounts Explained
A health savings account (HSA) can fund your deductibles in your high deductible health plan (HDHP), copays, and other out-of-pocket medical expenses. It is where you can put away some of your pre-tax earnings to pay for medical costs or save money for the future. But really, what is a health savings account?
Eligibility for an HSA
Anyone who has an HDHP, as per the government’s definition, can set up an HSA for themselves. Just make sure to stay up-to-date with how the IRS defines HDHPs in terms of the minimum deductible and maximum out-of-pocket spending limit that plan holders can make. Choose HDHPs with HSA-eligible tags because not all high deductible plans qualify for this savings account.
How it works
Individual HDHP plan holders can set up their own HSA, while others might have employers who offer both HDHP and HSA.
Once set up, you can choose how much to set aside in your HSA every year, although the government has set maximum contribution limits. HSA contributions for employment-linked accounts can be set up as automatic payroll deductions for your convenience.
Some accounts give checks to HSA holders while others produce debit cards. You can use either to pay for eligible medical expenses.
What is a health savings account in terms of the period of usage? HSA funds do not expire. You can use them a few days after you’ve saved the money or years after when you need to withdraw some for medical costs.
Since you own the HSA account, you can take it with you wherever you might choose to work. It is not tied to your employer, and unused funds can be carried over to the following years.
What is a health savings account for?
There is quite a long list of medical expenses that you can use your HSA for. These are the answers if you ask, “what is a health savings account for?”
- Dental treatment
- Birth control
- Fertility enhancements
- Maternity services, such a breast pumps, IVF, and breastmilk storage bags
- Hearing aids
- Contact lenses and other vision supplies, such as sunglasses, safety goggles, and contact lens solution
- Prescription eyeglasses
- Physical exams
- Lab work
- Medical supplies, such as compression socks, bandages, glucometers, and blood pressure cuffs
- Smoking addiction programs
- Drug addiction treatment
- Non-cosmetic surgery
- A few over-the-counter medicines, such as for allergies and acne
- Kids’ medical expenses, even for those who are not included in your plan
If you want to maximize the benefits of your HSA, learn more about the response to what a health savings account is for. Educating yourself about these can help you make decisions that will help you save money without scrimping on your medical needs.
The next viable answer to the question what is a health savings account for? is how it can lessen taxable earnings. It presents certain tax advantages to both employers and employees.
Contributions made by employers to their workers’ HSAs are considered as health plan contributions, and therefore not subject to employment taxes. They’re required to report such contributions on their employee’s Form W-2 by checking box 12 and specifying the amount they’ve contributed.
Tax benefits are in store for HSA-holding employees, too. First, it cuts down their federal income taxes by how much they contribute to their HSA and turn these savings into income tax savings and FICA. Second, every single cent of interest earned by the HSA and the money earned from mutual funds is tax-free. Third, all the withdrawals made to pay for eligible medical costs, as described above, are tax-free as well.
Potential pros and cons
While pondering on the answers to the question “what is a health savings account?” you should also factor in the potential advantages and disadvantages of an HSA.
Here are some of its potential benefits:
- You set your contribution to your HSA, depending on how much you think your medical expenses might be for the year without exceeding government-set maximum contributions
- You get to determine where and how to spend your HSA funds
- You own your HSA despite it getting contributions from your employer
- You get to save more if you unused funds that get rolled over to the next year and it stays with you indefinitely
- You cut down on taxes by putting money in your HSA
- Your HSA earnings are tax-free
Like other things, HSAs also have potential disadvantages, such as the following:
- You can’t predict illness, which makes it challenging to estimate how much to set aside for health care costs
- The ability to save money varies from one person to the next, with sicker and older people finding it harder to do so
- The latest medical care costs are not readily available information to the public
- Some people may choose to forego medical care to continue contributing to their HSA
- HSA funds spent on non-medical expenses require taxes
You can deliberate over the pros and cons of having an HSA and weigh your options. But the HSA may work best for the generally healthy HDHP plan holders who want to set aside money for medical expenses in the future. It may also work for older people who want to retire soon and prepare for their medical care costs after retirement. However, the HSA may not be the best option for those with existing medical conditions that require extensive medical care and who cannot afford a high deductible paid out-of-pocket.
If you choose to go for an HSA, educate yourself more to take full advantage of its benefits. This is a long-term commitment with benefits that may help you stay afloat even in your retirement, so manage your HSA well.