Ahh, autumn: the crisp air … the changing leaves … pumpkin spice everything … and benefits enrollment.
OK, that last one likely isn’t on your list of faves for fall. And no wonder, especially if you’re faced with an alphabet soup of acronyms for products and services you don’t really understand. Well, keep reading and we’ll take the mystery out of at least one option you might see on your enrollment form: health savings accounts, or HSAs.
As the name implies, an HSA is simply a savings account. You can use the money in it to pay for medical expenses not covered by your health insurance, such as deductibles, copayments or coinsurance. You can have an HSA only if you’re enrolled in a high-deductible health plan, also sometimes called a consumer-driven health plan. It’s likely the type of plan — or one of the options — your employer offers (ask if you’re not sure).
You put money in the account — the maximum allowed depends on whether you only or your family is covered — and your employer may contribute money, too.
Why sock the dollars away in advance instead of paying for health care expenses when and if they arise? For one thing, there are considerable tax advantages.
- Money you put in your HSA isn’t taxed because it comes out of your paycheck before your taxable income is figured. Your taxable income is lower, so you pay less income tax.
- Money in the account grows tax-free. You don’t pay income tax on the interest it earns like you do with some other types of savings accounts.
- Money you take out of the account to pay health care expenses is tax-free.
There’s another big advantage with an HSA, especially compared with a flexible reimbursement account available alongside a traditional health care plan: There’s no timeline for spending it. Unlike the “use it or lose it” rule with a flex account, your HSA money rolls over year to year and you can spend it on medical expenses any time until you retire. The money is yours, even if you’re no longer enrolled in the high-deductible plan, and you can take the account with you if you change jobs.
Yes, it can be tough coming up with the cash to kick-start an HSA. But remember, these accounts are only available if you have a higher-deductible health plan. And those plans have lower up-front premiums than more traditional health insurance. That could free up the funds you need to feed piggy.
Whether a high-deductible health plan with an HSA or a traditional health plan with a flex account is best for you and your family depends on your personal situation and expected health care needs. Understanding the options and how each option works is the first step toward making the right choice for your financial well-being.