Employers are increasingly offering high-deductible health insurance plans, sometimes pushing them on workers. If your company is getting on that bandwagon, you ought to consider signing up for a Health Savings Account, or HSA, which works hand-in-glove with a high-deductible plan. Many firms with high-deductible plans offer HSAs, but if yours has a plan and no HSA, you can get an account on your own at a financial institution.
An HSA is a triple tax-free account that can help you shoulder rising out-of-pocket medical costs. Your money goes into the account before it’s taxed, grows tax-deferred and can be withdrawn tax-free to pay unreimbursed medical expenses, including your deductible and health costs that aren’t covered by your plan.
(MORE: How to Ease the Bite of High Deductible Health Plans)
And here’s the little-known bonus: You can also use an HSA to boost your retirement savings.
HSAs vs. FSAs
Don't, however, confuse an HSA with the similar-sounding health care FSA, or Flexible Spending Account, as nearly 75 percent of people responding to a recent Fidelity Investments survey did.
While you can use both accounts to pay health bills, there are two big differences: 1) An HSA lets you roll over any money you don’t spend by Dec. 31 and 2) After age 65, you can withdraw money for nonmedical expenses without owing a tax penalty. (Those withdrawals are taxed as income, as with traditional IRAs.) An FSA, by contrast, is a use-it-or-lose it account; if you don’t spend the money you’ve put in before year’s end, it disappears.
To take advantage of an HSA, you can’t be enrolled in Medicare or claimed as a dependent on another person’s tax return and your health plan must be what’s known as a Qualified High-Deductible Plan. That means its annual deductible must be at least $1,250 for individuals, $2,500 for families.
Contribution Limits for HSAs
If you sign up for an HSA and you’re under 55, you can put in up to $3,250 this year for an individual account and as much as $6,450 for a family plan. The maximums are $4,250 and $7,450 for people over 55. The annual limits will rise in 2014 to $3,300 for an individual and $6,550 for a family (add $1,000 to each for people over 55), says Linda Huber, senior vice president and employee benefits practice manager for Heffernan Insurance Brokers in St. Louis.
(MORE: Your Guide to Obamacare Options)
Most employers also contribute to their employees’ HSAs — $919 for single coverage, on average, and $1,611 for family coverage, according to the Kaiser Family Foundation.
You can change the amount of your contribution to an HSA any time during the year, as long as you don’t go over the annual limit, says William J. Grossmiller, a benefits consultant with Crawford Advisors in Hunt Valley, Md.
If you’re eligible to enroll in an HSA, your employer doesn’t offer this benefit and you want to open an account at a financial institution you need to do so by April 15 to make contributions for the current year, Huber says. So you’d have to wait till 2014 to get an HSA on your own.
Now that the basics are out of the way, here are eight tips for getting the most out of your Health Savings Account:
1. Extracting the money from your HSA is as simple as using a checking account. You can receive blank checks, a debit card or both. The debit card may be used for online purchases.
2. You can use an HSA to pay for medications only if you have a prescription for them, including those sold over the counter. The exception is insulin; it doesn’t require a prescription. This rule was part of the Affordable Care Act, also known as Obamacare.
3. Nontraditional medical services, like acupuncture and massages, can qualify as legitimate HSA expenses. They’ll need to be permitted by your high-deductible health plan and you must have a prescription from your doctor, Grossmiller says.
4. Avoid the steep penalty for using your HSA for non-medical expenses before 65. “If you pull the money out before then for anything other than reimbursable expenses, there’s a 20 percent tax on the amount of the withdrawal,” Huber says.
5. If the IRS audits you about your HSA before age 65, you’ll need to prove the account was used for qualified expenses. To protect yourself, keep receipts for all out-of-pocket health costs and be sure the bills you pay with an HSA meet the IRS test for qualified medical expenses, Grossmiller says.
The complete rules about qualified medical expenses are in IRS Publication 969, but keep in mind that you can’t pay for health insurance premiums or cosmetic surgery out of an HSA.
6. Once you turn 65, you can no longer contribute to an HSA. But you can make penalty-free withdrawals.
7. An HSA is especially worth considering if you’re already maxing out your 401(k)-type plan and IRA. “It’s another avenue to fund a retirement account,” Grossmiller says.
8. Be careful about how you'll invest your HSA. Employees are typically given an assortment of investment options, much like 401(k)s.
You probably should avoid putting all the money into stocks or equity mutual funds, due to the volatility of the market. “Since the purpose of an HSA is to pay for medical expenses, it is important to balance risk, especially in newer accounts that will have lower balances,” Grossmiller says. The last thing you’ll want is a medical emergency and no money to pay for it.
Sharon Anne Waldrop writes about finance, insurance, green living and health topics for Next Avenue, Good Housekeeping, Woman’s Day, Bankrate.com, Creditcards.com, and many other national magazines and websites.