A health savings account, or HSA, is a popular way to manage your healthcare costs, especially as insurance premiums continue to rise each year. Is an HSA right for you? It's difficult to say without knowing the details of your particular situation, but HSAs offer various features that should benefit almost anyone. If you’re eligible for an HSA, it’s worth considering how this type of savings account may help you financially prepare for your healthcare needs.
What Is An HSA?
An HSA is a savings account that gives you the ability to pay for medical or healthcare that offers tax advantages. If the deposits are made automatically from a payroll deduction, the funds aren’t taxed. If you make a post-tax contribution from another source, these contributions are then tax-deductible on the federal level and potentially at the state level, too.
You’ll earn interest on your HSA balance as you would with any savings account. The interest is tax-free, and any money spent from your HSA remains tax-free as long as it’s spent on qualified medical expenses.
Am I Eligible for an HSA?
Not everyone is eligible for an HSA. You must be enrolled in a high-deductible health plan to open an HSA or contribute to it. There are no exceptions to this rule. If you’re unsure if your health insurance plan qualifies, you should reach out to your employer’s HR department or your insurance agent.
You may be ineligible for an HSA if you are enrolled or using Medicare benefits, a claimed dependent on another person’s taxes, or covered by someone else’s health insurance coverage, such as a spouse’s insurance through his or her employer. The only exception to the latter point is if the insurance is a qualified high-deductible plan.
Beyond your eligibility requirements, there are also limits on how much you can contribute to your HSA each year. For 2020, those with single coverage could contribute up to $3,550. All HSA contribution limits include those made by you and your employer. For family coverage, you could contribute up to $7,100 in 2020.
What Are the Benefits of an HSA?
Perhaps the most significant benefits an HSA offers are the tax advantages mentioned above, as contributions made directly from a payroll deduction are tax-free. Post-tax contributions can be deducted from your year-end taxes. The earned interest in your HSA is also tax-free. Finally, as long as you use your HSA on qualified medical expenses, any money spent from your HSA remains tax-free.
With most employer-based insurance coverages, you lose your coverage when you leave your job. While you may have access to coverage through COBRA, the premiums tend to be much higher without your employer’s contributions. HSA funds, though, can be used on insurance premiums through COBRA or an independent offering. So, even if you lose your job, you can use tax-free funds to help pay for new insurance coverage.
Additional benefits were granted as part of the 2020 coronavirus stimulus bill, though not all of these changes are permanent. The most significant impact likely stems from the expanded list of qualified medical expenses. Many over-the-counter medicines are now eligible without the need for a written prescription. Currently, there is no set expiration date for this change.
Another change is the ability to use your HSA dollars for telemedicine. You previously needed to hit your deductible before these virtual visits could be paid for with HSA funds. However, that restriction has been lifted for now. This change is currently set to expire at the end of 2021, though.
When you open your HSA at Blackhawk Bank, you receive numerous benefits, including:
- Fee-free enrollment
- No minimum balance to open
- Debit card, online banking, and Bill-Pay access
- Money Market HSA and self-directed investment options available
What Are Qualified Medical Expenses?
As HSAs involve tax advantages, the list of qualified medical expenses is governed by the IRS. You should use their website for the full list.
While the IRS website should be accurate, it's important to note that the list is subject to change, and you may have to pay a 20% tax penalty if you use HSA funds for non-qualified expenses. Furthermore, some expenses may have additional eligibility requirements. If you’re unsure whether an expense qualifies, you should consult a tax advisor.
When you look through the list of eligible expenses, it’s clear that many, if not most, healthcare needs are represented. Even things that make treatment easier, such as some travel expenses for medical care, improvements to your car or home to make them easier to manage if you are disabled or have special needs, and braille reading material, are considered qualified medical expenses.
A list of ineligible medical expenses tends to include procedures or treatments that aren’t typically medically necessary, such as cosmetic surgery, hair transplants, or teeth whitening. Other areas of ineligibility include general household help, personal items, or veterinary care. The full list of ineligible services and products is also included on the IRS website.
How Much Should I Contribute to My HSA?
When it comes to how much to put in HSA accounts, the general rule of thumb is to max out your contribution each year. Of course, there are times when that may not be to your advantage, or you may not be in a place financially to hit that contribution limit.
One of the best ways to see how your contributions take shape over the course of your HSA’s lifetime is to use our HSA calculator for contributions as well as our HSA Savings Calculator, which we discuss further below. These tools can help you plan for expected medical events, such as a new baby, and make it easier to determine whether you will or will not hit your financial goal in time.
If you aren’t able to maximize your contributions each year, you should still add what you can. If your employer doesn’t offer dental or vision coverage, it makes sense to contribute at least the amount you’re paying in premiums each month. Since that’s money you’ll be spending anywhere, you should at least take advantage of the tax-free nature of HSAs.
HSAs also offer a distinct difference from similar account types, such as flexible spending accounts. FSAs have a “use it or lose it” feature which means any unspent funds are inaccessible once the new year begins.
That is not the case with HSAs. Any unused balance rolls over at the end of the year, just as a typical savings account would. So, there shouldn’t be any fear of “losing” contributions if they go unused throughout the year.
HSA Contributions Calculator
Maximizing your HSA contribution is an important way to get more mileage from your account. The IRS determines the maximum amount you can contribute each year based on factors like your age and whether you have single or family coverage.
Our HSA Contributions Calculator is the key to determining your maximum total contribution based on a few fast facts.
HSA Savings Calculator
This HSA Savings Calculator is the best way to determine your Health Savings Account’s potential value over time. By calculating the time left to retirement along with your current balance, HSA contributions, and healthcare expenses, you can get a bird’s eye view of the total account growth over time. This helps you plan different scenarios for your savings and retirement.
How Can Blackhawk Bank Help?
At Blackhawk Bank, we help Beloit, WI residents, and the surrounding areas hit their financial goals. We make opening an HSA an easy, fee-free process, and bankers can help you plan for expected medical events.
Reach out to us today by calling 800-209-2616 with any questions about opening up an HSA. You can also call to set up an in-person appointment too.