Check Up

Health savings accounts often get a bad rap. They are written off as risky, but the benefits are rarely discussed. HSAs have big tax advantages and can be used as an investment vehicle.

“It’s probably not as common as maybe it should be. There’s not really a lot of education around it,” says Amanda Sharratt, a financial adviser at the Wooster location of Whitaker Myers Wealth Managers.

How do you know if it’s right for you? What is an HSA anyway? As open enrollment time for many health plans nears in the new year, Sharratt explains the pros and cons of sticking to a traditional health plan or making the jump to an HSA.

Numbers Game

Before you consider switching, you have to know what you’re looking at. Open enrollment can be so stressful that it’s easy to gloss over key terms and features of a health plan. Sharratt has been there, but she recommends doing a little legwork first.

“Knowledge is power,” she says. “[It’s] educating yourself on the different terms of what is the deductible, what is coinsurance, what is out-of-pocket and how does that impact you financially.”

An HSA is a companion to a high-deductible health plan with a deductible over $1,400 for individuals and over $2,800 for families. For HSAs, there are also required out-of-pocket maximums, which are $6,900 for individual coverage and $13,800 for families. Payments toward copays, your annual deductible and coinsurance for covered services apply toward the out-of-pocket maximum, and once it’s met, the insurance usually pays for all covered services.

High-deductible plans generally have a higher out-of-pocket maximum, but the monthly premium is lower. Traditional insurance plans typically have lower out-of-pocket maximums but higher monthly premiums. With the high-deductible plan, you often pay more coinsurance, which is the percentage you pay of covered services after your deductible is met. Depending on the plan, you could pay for 100 percent of covered services until you satisfy your deductible, and afterward, you might pay a coinsurance of 20 percent of covered services and your insurance pays for the other 80 percent. For traditional plans, the coinsurance often kicks in sooner.

For 2020, contributions to HSAs are capped at $3,550 for individuals and $7,100 for families, with an annual $1,000 catch-up contribution permitted beginning at age 55. You can set it up so your premiums for a high-deductible plan and contributions to an HSA are automatically withdrawn from your paycheck. If your employer doesn’t have an HSA, financial institutions, including Whitaker Myers, have options to open one, and if you leave your job, your account stays with you.

HSAs often get confused with Flexible Spending Accounts, which you can make tax-free contributions to for paying medical expenses and are offered in addition to health plans. With FSAs, however, up to $550 can be rolled over year to year. While with an HSA, all contributions roll over, so you don’t have to worry about losing any money you add and don’t use for medical expenses.

Good Save

Having a high-deductible plan may seem intimidating, but there are several benefits of HSAs that may outweigh the risk.

The biggest is that HSAs have triple tax advantages. “The contributions are pretax, the account grows tax-free and the withdrawals are not taxed, provided the money is used for a qualifying medical expense,” Sharratt says.

Qualifying expenses include hospital bills, prescription medications, office copays, dentist visits, vision checkups and more. The HSA funds you use for eligible expenses count toward meeting your deductible, coinsurance and out-of-pocket amounts. Making sure an expense is qualifying is very important because if you use your HSA money for non-eligible medical expenses before age 65, you will have to pay a 20 percent penalty.

With careful management, an HSA can act as another retirement savings tool. Similar to an individual retirement account or a 401[k], the money in your HSA can be invested in stocks, bonds or funds. Your contributions could grow over time, and that growth can become a cushion for extra medical expenses that will inevitably come up as you age. “Especially if you’re not using all of the money that you put in there every year, it’s a really great financial planning tool for retirement, because health care typically gets more expensive for people in retirement,” Sharratt says. “So having money in your HSA will be really beneficial.”

Once you turn 65, you can take money out for nonmedical expenses without a penalty, but you will pay taxes on anything withdrawn for nonmedical use. She advises to gradually make withdrawals, rather than doing so all at once. “Even if you’re healthy, but you have to get a prescription or something like that,” she says, “that’s a way to take advantage of the triple tax advantage because you’re not paying taxes when you use it.”

The Decision

HSAs sound like a game-changer for your finances, but keep in mind, they’re only right for certain people.

Sharratt says two things can help you decide: “Health and financial situation is the rule here.”

She recommends making a chart of what you spent on premiums, deductibles, doctors’ visits and other health care expenses in a typical year with a traditional health plan. Compare those amounts with those for an HSA. Make sure to factor in how much you would contribute to an HSA and any tax savings or potential growth.

“That’ll help you see the financial impact of both and make the right decision,” she says. She adds you can also take quizzes through your employer or online during open enrollment to factor in any kids you have, how many times you visit the doctor, past emergency room trips and more.

The answer can vary for individuals and families. Sharratt lays out an example for a family. If you are going to the doctor frequently with three kids and the deductible on a high-deductible plan you choose with an HSA isn’t far over the $2,800 threshold, you’re going to reach the deductible sooner than if that wasn’t the case, so changing to an HSA and reaping the benefits might pay off.

The lower premium that comes with HSAs tends to attract healthy individuals who save money on monthly premiums and rarely visit the doctor. For them, having less coverage isn’t a worry, and they can divert savings to a tax-free account. HSAs also draw high-income earners because they have funds that cover the risk of paying more if a medical emergency arises.

The possibility of large medical bills with HSAs is a risk you have to measure. Sharratt says if you do switch to an HSA, it initially takes some time to build up enough funds in the account to cover medical expenses, so you want to be at a stable place financially in case you have to pay a large medical bill right off the bat. “The year in which you make the change and start off from brand-new, you don’t have any money in there,” she says. “So if you have a high medical expense in the beginning of the year, you have to be prepared to pay that until you get money to fund it into your HSA.”

Sharratt had a medical emergency come up the year she moved over to an HSA and had to initially pay out of pocket. “We had to pay it out of our monthly budget, but then later in the year, we were able to reimburse ourselves from the HSA to cover the medical expense,” she says. To get a reimbursement, you need a receipt from the doctor’s office, so keeping good records is imperative. Some HSAs have a debit card connected to them specifically for withdrawals, so that makes keeping track easier.

She advises having a fully funded emergency fund that could cover three to six months of expenses before getting an HSA. When you need to pay a large bill that exceeds the amount in the HSA, you can withdraw from the emergency fund and reimburse yourself later when you’ve saved up more in the HSA.

For Sharratt, the switch was seamless, because she took the difference from the higher premium of the traditional plan and the lower premium of the high-deductible plan and put it into an HSA. “We were putting [in] the same amount monthly, but now we’re funding the HSA and have money to pay for medical expenses,” she says.

The money she contributed is not only diverted from taxes but also is a growing investment. If the numbers are right and you’re comfortable with where your health and bank account are at, an HSA could become the cushion you need for later. If you aren’t sure, a financial adviser can help you decide.

“Especially for the people it’s right for, they [should] make sure they are at least looking at it,” Sharratt says. “There’s really nothing else [that’s] going to give you that triple tax advantage savings for medical expenses that you can then roll over and have that flexibility of it in retirement.”