What is a Health Savings Account? (HSA)

What is an HSA?

A Health Savings Account (HSA) is an investment account that allows savers to invest capital into traditional assets (stocks, bonds, etc.), and then later use that money to help pay for medical and dental expenses.  HSA’s are one of the best types of investment accounts because they are doubly tax advantaged.  That means you can deduct your contributions annually, reducing your taxable income.  Then, when you withdraw, you pay no taxes if the money is being allocated to qualified medical expenses.  In essence, HSA’s function like a traditional IRA for contributions, but like a Roth IRA for withdrawals, making them exceptionally efficient savings vehicles.  Unfortunately, not everyone qualifies for an HSA, so some due diligence is required to start the process.

For 2019, qualified investors can contribute up to $3,500 for single coverage, or $7,000 for family coverage.  If you’re 55 or older, there is a “catch-up” program in place, which allows an additional $1,000 per year to be placed in an HSA.

Who qualifies to open an HSA?

HSA’s are only available to people that are enrolled in a high-deductible health plan (HDHP).  Generally these plans have lower monthly premiums, but higher healthcare costs for the account owner before the insurance company pays out expenses.  For 2019, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $6,750 for an individual or $13,500 for a family.  For 2020, those limits are increasing to $1,400 for individuals, $2,800 for families, and the HDHP’s total yearly out-of-pocket expenses can’t be more than $6900 for an individual or $13,800 for a family.

Some employers offer high-deductible health plans and a corresponding HSA option as part of their benefits package.  If they don’t, most investors can open separate HSA accounts as long as they have qualifying plans.  We manage HSA accounts at Arrow, and can work with you to open an account and check your health plan’s eligibility.

What are the advantages and disadvantages?

The primary benefit of an HSA is the incredible tax advantages they offer.  HSA contributions are pre-tax if enrolled through an employer, or tax-deductible if enrolled independently.  In addition, the account grows tax free, and if withdrawals are made for eligible medical expenses, there is no taxes required on those either.  Another benefit is the flexibility of the accounts.  HSA’s can be invested in a variety of investment vehicles, such as stocks, ETF’s, mutual funds, or bond funds.

The primary disadvantage of an HSA is the severe penalties involved with early withdrawal for non-medical expenses before the age of 65.  If HSA funds are withdrawn for non-medical use before 65, they are subject to losing their tax-exempt status, and are subject to income taxes.  In addition, there is a 20% tax penalty for early non-medical withdrawals.  After the age of 65, the HSA funds can be used for general non-medical purposes, without any penalty.

As a general rule, it’s best from a financial planning standpoint to fill an HSA each year only if you’re maximizing your 401k contribution and your IRA.  Those funds are always going to be more flexible, and can be used for a broader range of expenses.  However, there are other considerations that might make using an HSA over other types of investment vehicles more appealing for certain people.  For example, a person whose family history suggests a high likelihood of increased medical costs at a young age might want to prioritize an HSA over a non-matched 401k contribution.

What types of medical expenses are covered?

Married individuals may use their individual HSA to cover the qualified expenses of their spouse, though each spouse that is eligible must open a separate HSA if possible (they can’t be joined).  Two separate HSA’s don’t qualify for the family coverage limit.

Common IRS-qualified medical expenses include:

·         Doctors office visits and co-pays

·         Dental treatments

·         Drug prescriptions, birth control, and OTC medicines if prescribed

·         Lab fees, surgeries (non cosmetic)

·         Physical therapy, special education services, walkers/wheelchairs, crutches

·         Eyeglasses, vision exams, laser eye surgery, contacts

·         Acupuncture, chiropractor, fertility treatments, vaccines

Ineligible medical expenses include:

·         Childcare, nursing services (for healthy babies)

·         Cosmetic surgery

·         Funeral expenses

·         Health club costs

·         Medicines from non-USA countries

·         Teeth whitening, hair transplants, electrolysis or other cosmetic improvements

·         Insurance premiums

·         Nutritional supplements

How do I open an HSA?

If you’re receiving an HSA through your employers program, they likely have a relationship with one or more HSA providers (see list here).  Enroll and create an online account with that provider, and you can either contribute at your discretion, or with automatic contributions through your workplace.  At Arrow, we use HSA bank, and our clients fund their HSA online.  Then we manage the assets in the account and include it as part of our clients overall investment portfolio.  Most funds also allow debit cards or checks linked directly to your HSA balance, for easy access to pay qualified medical expenses.