Health Savings Accounts: when you can have one

Earlier this week I wrote about Flexible Spending Accounts (FSA) and the “use it or lose it” rule. Today’s post discusses Health Savings Accounts (HSAs), which are a very different kind of account. FSAs and HSAs both give employees tax-advantaged opportunities to finance health care costs in a consumer-driven health insurance plan; but HSAs are far more advantageous if you have a plan that permits you to open an HSA.

What is a health savings account?

A Health Savings Account, or HSA, is a tax-advantaged savings account that can only be used for qualified medical expenses when an individual opens the account in combination with a high deductable healthcare plan, or HDHP. An HDHP is a plan that, as the name suggests, has a very high deductible. It is designed to cover some preventative care but otherwise makes the employee responsible for financing the “first dollars” of healthcare in non-preventative care situations (such as going to the doctor when you are sick or an ER visit when an injury occurs).

The HSA allows you and/or your employer to set aside pre-tax money to help cover the deductible and other qualified out of pocket expenses. The funds in the HSA grow tax-deferred and you can take distributions from the account tax-free as long as they are for qualified medical expenses. Like a 401k, you can invest your HSA funds in various investment vehicles. The federal government sets limits for HSA contributions annually but there is no annual limit to distributions. As long as the distributions are for qualified medical expenses, they are tax-free. If you take distributions before 65 for any other purpose you will pay taxes plus a stiff 20% penalty.

Unlike an FSA, which requires you to exhaust FSA funds each year or forfeit the remaining balance, HSA balances roll over each year and you can continue to accrue tax-deferred earnings. The account is portable, so it belongs to you individually rather than remaining a part of your employer’s plan, such as the way a 401k account always remains part of the employer’s 401k plan. Upon your death, your HSA can pass on to your beneficiaries like other tax-deferred accounts.

When can you open a health savings account?

You may only open an HSA when you enroll in an HDHP. It does not require an employer-sponsored HDHP plan; but it cannot be a non-HDHP plan, such as an HMO or PPO. The HSA may be funded with payroll deductions or employer contributions. Although the HSA remains yours, when you cancel coverage in a HDHP you can no longer contribute to one. However, you can still use the funds in the HSA after your HDHP coverage ends.

If you enroll in a HDHP to cover your family, each family member may not open their own HSA. Rather, the individual named the primary insured on the policy is the only person who may open the HSA. However, the contribution limits for HSAs increase when the HDHP coverage is on more than one member of the family. That makes a lot of sense because HDHPs tend to set a higher deductible for family coverage before the plan begins paying for non-preventative care expenses.

Carefully consider your employee benefits

Health savings accounts and other employee benefit plans are an important part of how most families access health care. After passage of the Affordable Care Act (ACA) there is no question that employment has become the avenue for accessing any sort of affordable health care for most people. As a result of the ACA and the cost of health insurance, many employers expanded high deductible plan access over traditional PPO and HMO options. This opened the door for more HSA-connected plans. You should carefully consider the health care options available for insurance through your employer. A high deductible plan with a health savings account may be a good fit for some families. If you have questions about your health insurance options then you should speak with an attorney familiar with employee benefit plans. An experienced attorney can help you understand your rights on the job.

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