Numbers

Why you need an HSA Today!

Let’s discuss Health Savings Accounts or HSA’s and how they work.

In transparency, I recently opened an HSA with Lively. I did it all online and they have great resources on their website too. They were recommended to me by my insurance broker and she was spot on with how simple it was. So I thought I would share with you what I have learned from the process and from Lively.

Health care costs for Americans have been skyrocketing. According to projections by the Peter G. Peterson Foundation, total health care spending in the U.S. is forecasted to increase by 5.6% annually for the next decade — faster than the country’s economy.

Health Savings Account (HSA) can help you plan for and beat these rising costs. HSAs offer some of the greatest tax advantages for both individuals and families who have a high-deductible health plan (HDHP). It can lower your costs for eligible medical expenses right now and can also be used to save for future health care costs, even into retirement.

An HSA is a tax-exempt financial account. Tax free is what that means. bWith an HSA, you can set aside, save money into this new HSA account that is now earmarked specifically for health care costs. Then on your annual tax return you get to deduct those contributions you made from your income. Thus you have lower taxable income and pay less in taxes. Great news right!?

The money in your HSA also grow tax-free, and you can use them on a tax-free basis to pay for eligible medical expenses.

To qualify for an HSA, you need to have a specific type of health insurance plan known as a high-deductible health plan. For short they are HDHPs. HDHPs have lower premiums making them a good option for people who don’t anticipate having a lot of medical expenses or simply want to save on monthly payments.

Even if you expect to spend thousands of dollars on health care costs, the benefit of an HSA may be worth it to choose an HDHP over a plan with a lower deductible.

Based on 2022 IRS specifications, a health plan is an HDHP (and qualifies for an HSA) if it has a minimum deductible of $1,400 for individuals and $2,800 for family plans. Qualifying plans must also have maximum out-of-pocket amounts of less than $7,050 for individuals and $14,100 for families. Check with your insurance company to verify if your current plan qualifies.

To take full advantage of tax savings and to build a reserve for the future, it’s suggested that you save as much as possible in your HSA. However, there are limits to how much you can save with an HSA each year.

The 2022 contribution limits set by the IRS are $3,650 if you have an individual health plan and $7,300 if you have a family health plan. If you’re 55 or older, you can make catch-up contributions of up to $1,000 on top of the regular limit each year.

There’s no time limit for when you can use the money in your HSA to pay for eligible medical expenses — it’s not a use-it-or-lose-it arrangement like a Flexible Spending Account.

When you’re ready to use the money, however, you’ll typically have two options. The first is to use a debit card that’s tied to your HSA. When you first opened your account, most providers send a debit card for convenience. That is what I did. I use my HSA debit card when I go to the doctor or pharmacy to pay for those costs and they are deducted from the balance I already have saved in my HSA account.

The other option is to pay the bill on your own and request a reimbursement from your HSA provider which is much more time consuming. This is why I really appreciate the ease of the Lively HSA.

If you don’t have enough eligible health care costs this year, you can save money until you need it. Some people may even choose to use an HSA as a retirement account, where health care costs can make up a significant portion of your budget. That is one of the reasons I decided to open an HAS.

Most Health Savings Accounts function like a traditional savings account — your funds earn a nominal interest rate that’s equivalent to what you’d earn if you put the money in savings with your bank or credit union. Lively also gives you the option of investing your account in other ways. However, if you anticipate using your HSA funds in the same year that you contribute them, you may be better off keeping the money safe with the lower and safer savings rate.

One of the most important things to know about Health Savings Accounts is that the tax benefits work only if you use your funds for eligible expenses. If you don’t, your withdrawals will be taxed as income, and you’ll also be subject to a 20% additional tax.

The only exception to that is if you become disabled, die, or reach age 65, you can use HSA funds for non-medical expenses without incurring the 20% additional tax. However, those funds will be considered taxable income at that time.

The IRS provides a long list of eligible medical expenses that you can cover with your HSA funds. These costs generally include payment to doctors, hospitals, and other health care providers, over-the-counter and prescription drugs, imaging such as MRIs, medical services such as home care, and medical equipment or supplies.

If you submitted a claim to your health insurance company and it didn’t cover the full amount, you can use your HSA funds to pay the remaining balance. Keep in mind that you cannot request reimbursement from your HSA for costs covered by your insurance plan.

Since I wear contacts vision care was a big factor for me. Vision care is typically not covered by a health insurance plan but the good news is you can use your HSA to pay for eligible vision-related expenses. That includes things like eye exams, eyeglasses, contact lenses and solution, eye drops, eye surgery and even vision correction.

The list even includes sunglasses if they have prescription lenses and you didn’t purchase them over the counter.

Dental care is also an eligible expense. 

If you qualify for an HSA and can afford even small contributions, the benefits of an HSA are worth it. The biggest perk of having an HSA is the triple tax savings:

  • Pre-tax or tax-deductible contributions
  • Tax-free interest and investment earnings
  • Tax-free distributions, when used for qualified medical expenses

If you’re going to spend the money on health care costs anyway, contributing the cash to your HSA first will effectively reduce your total cost. For example, if you have an effective tax rate of 15% and you spend $5,000 on qualified medical expenses through an HSA, that’s $750 worth of tax savings.

If you don’t use funds, they remain in your HSA each year. They also continue to earn interest or investment gains and don’t have to pay taxes on it. If you use HSA money in retirement to cover eligible expenses, it’ll still be tax-free. But if you use it for other purposes, you’ll just have to pay regular income taxes. 

I don’t know why I waited so long to open an HSA but now that I see all the great benefits I want everyone to be aware of this great tax savings tool.