Many companies are nearing the end of their open enrollment period soon, which that means it’s time for you to finalize your choices about your benefits. One of the options many employers offer these days is a Health Savings Account, or HSA. An HSA is just what the name implies: A savings account specifically for your health care costs. Although similar to other savings options, such as the Flexible Spending Account or Health Reimbursement Account, an HSA has rules of its own (see this post for more on the specific differences). Here are some guidelines for who can open an HSA and how it should be managed.
Who can open an HSA?
You can open an HSA if you have a High Deductible Health Plan (HDHP) as your only insurance and are not claimed as a dependent by another person. What counts as a high deductible? In 2012, the levels are:
-$1,200 for a single plan
-$2,400 for a family plan.
Why open a separate savings account for health expenses?
The primary reason to open an HSA (if you’re eligible) is that you can place money in it pre-tax, which gives you an effective discount on everything you spend. Think of it this way: If you pay a tax rate of 20%, then you have to earn $125 to pay for a $100 service. But if you are paying with your tax-free HSA, you only have to earn $100.
What can I spend my HSA on?
You can only spend HSA money on “qualified health expenses,” which includes most major medical, dental, or vision expenses. Over-the-counter medications were once covered, but no longer count as of January 2011. You can also pay for certain health insurance premiums with your HSA. These include:
-Health insurance while you are receiving unemployment compensation
-Medicare Part A, B, and D premiums
-Retiree health plan premiums
-Qualified long term care insurance premiums
How much should I deposit in my HSA?
Just like any savings account or retirement account, it depends on what you plan to do with it.
Do you expect to get health insurance with a lower deductible soon (including Medicare)? What has your historical spending been? (Use a service like Simplee or Cake Health to find this out quickly.) What health expenses to you expect to have in the next year?
There are two kinds of HSA consumers. Let’s call them “Health Savers” and “Health Planners.” Which one are you?
Health Savers don’t have high medical costs at the moment and have some extra cash to spare.
For them, an HSA is like a rainy day fund. It doesn’t hurt to put a little extra in an HSA. Because the money is yours, it rolls over year to year and you won’t lose it if you don’t spend it. The money rolled over will also still accrue interest.
Don’t go and deposit your life-savings in an HSA though. There is a penalty to withdraw funds for anything that is not a qualified health expense, so if you think you may need the money for something else, it may be better to hold off because you can always deposit it later. There are also limits to how much you can contribute each year (see below).
When you become eligible for Medicare, you can no longer contribute to an HSA. However, the money you have already deposited is yours and you can still draw it out to pay for medical expenses, tax free.
Health Planners know that they have some medical costs around the corner, so an HSA is more of a planning tool. A good rule of thumb is to save the amount of your deductible, plus the co-pays or coinsurance for the services you plan to get. There are annual limits to how much you can contribute. For 2012, the levels are:
-$3,100 for a single plan
-$6,250 for a family plan
If you have dependents, you can pay for their health care expenses with your HSA too, even if they are not covered by your HDHP.
Finally, don’t worry if you don’t know exactly how much to save, or if you don’t get your HSA just right. Think of it as money you were going to spend on health care anyway, only it’s saved in a place where you won’t be taxed. So, if you need to draw on other savings, or if your HSA rolls over to the next year, it’s OK! Like most budgets, Health Savings Accounts will never be perfectly balanced.