While there is no standard open-enrollment period for job-based benefits, many workplaces hold their annual open-enrollment periods in the fall. At this time employees and their dependents may select health insurance coverage as well as supplemental plans such as dental and vision insurance. As you review your benefits options for the year to come, consider a health savings account paired with an HSA-compatible high-deductible health insurance plan.
A health savings account, commonly referred to as an HSA, offers a way for employees to save money for health care expenses and, due to the way they are designed, save money on those expenses as well. HSAs have become increasingly popular among employers and employees. In January 2012, more than 13.5 million people were enrolled in an HSA paired with a high-deductible health insurance plan—in 2008 there were just 6.1 million.1
What is an HSA?
An HSA is not health insurance. Health savings accounts are exactly what they sound like: savings accounts for health expenses. HSAs allows you to set aside pre-tax dollars to be used for qualified medical expenses. For instance, you may use these funds to pay medical bills until your annual health insurance deductible has been met and benefits kick in.
An HSA must be paired with a high-deductible health insurance plan. For the 2015 calendar year, the IRS defines a high-deductible health insurance plan—aka HDHP—as a health insurance plan with the following annual deductible and out-of-pocket spending limitations2:
- Not less than $1,300 for self-only coverage
- Not less than $2,600 for family coverage
- Out-of-pocket cap—annual out-of-pocket expenses, which may include deductibles, copays and other amounts that do not include premiums, cannot exceed this amount
- $6,450 for self-only coverage
- $12,900 for family coverage
How does an HSA work?
Essentially, you can dictate how much money you place in your HSA. It is not typical for there to be a minimum contribution amount or frequency. However, the IRS caps how much you can save in a calendar year; this inflation-adjusted contribution limit is updated annually. Some companies will contribute funds to employee HSAs as well. Check with your employer’s benefits administrator. In reality, anyone may add funds to your HSA.
You can withdraw funds to pay for qualified medical expenses, including out-of-pocket costs to help reach your health insurance deductible. Typically, you will be given a debit card when you open your HSA. If you do not use them, you can roll them over year to year. This is unlike a flexible spending account in which you “use it or lose it.” Funds may accrue interest over time. Some people even use HSAs to save for retirement.
If you leave your workplace for any reason, your HSA goes with you. However, it must be paired with an HDHP for you to continue making contributions. Even if you do not combine your HSA with another HDHP, you can keep using the funds for qualified medical expenses or continue saving them for later. Once you reach age 65, you may withdraw funds and use them as you would a traditional IRA; you will pay standard income taxes. If you withdraw funds before age 65 and do not use them for qualified medical expenses, you will have to pay standard taxes on the amount withdrawn and may be charged a penalty by the HSA provider.
What are the HSA contribution limits for 2015?
The annual contribution limits for 2015 are as follows3:
- Individuals with self-only coverage under a high-deductible health insurance plan: $3,350
- Individuals with family coverage under a high-deductible health insurance plan: $6,650
What qualified medical expenses may I pay for with my HSA?
A list of qualified medical expense may be found in IRS Publication 502: Medical and Dental Expenses. The IRS updates this document annually at IRS.gov.
Why would I want an HSA?
HSAs help put you in control of your healthcare spending, accrue funds for future medical bills of both the expected and unexpected nature, and allow you to pay for qualified medical expenses tax-free.
Health savings accounts are gaining popularity among Americans with job-based health insurance coverage. In 2014, 27 percent of companies that offered health insurance benefits offered a high-deductible health plan with a health reimbursement arrangement (HDHP/HRA) or an HSA-qualified HDHP.4 Four percent offered an HDHP/HRA, and 24 percent offered an HSA-qualified HDHP.5
PPO plans cover more than half of America’s workers, but high-deductible health insurance plans with a savings option such as an HRA or HSA are the second most popular. Twenty percent of workers are enrolled in HDHP/SOs.6 Of them, 14 percent were enrolled in HSA-qualified HDHPs.7
What if I work for a small business and buy health insurance through SHOP?
HSA-compatible HDHPs are available through the Small Business Health Options Program (SHOP) marketplace—the employer portal for state-based and federally facilitated exchanges.
What if I don’t have access to health insurance through an employer?
You may still buy an HSA-compatible HDHP in the private marketplace and set up a health savings account through a financial institution. If you purchase your health insurance through an exchange and receive a premium tax credit, consider setting aside some or all of the money you saved on monthly premium in the HSA.
Most frequently, bronze and silver plans will be HSA compatible. If you are not sure if the health insurance plan you want to buy is HSA compatible, contact the company offering the plan, an exchange-based helper or licensed health insurance agent for assistance.