The ABCs of HSAs

William J. Phillips, Commerce Bank

More people than ever can choose a Health Savings Account (HSA) as part of their healthcare coverage. But what exactly is an HSA, how can it be used, and does it make sense for you? If you’re curious, read on for answers to these and other frequently-asked questions.

What is an HSA?
An HSA is an interest-earning savings account. It’s specifically designed to pay for healthcare expenses, and it must work in conjunction with a high-deductible health plan (HDHP). Basically, you use your HSA funds to pay for medical needs until you reach your insurance deductible. When your insurance kicks in, you can still use your HSA for costs not covered by the policy, such as co-pays.

There is a limit to how much you can contribute to your HSA every year. For 2018, it’s $3,450 (single coverage) or $6,900 (family coverage). If you’re 55 or older, you can make annual catch-up contributions of $1,000. Nearly anyone can contribute to your account, including your employer, your spouse and other relatives.

What are the benefits and risks?
HSA funds are considered "triple tax-free," because you don’t pay taxes on contributions, interest or withdrawals used for qualified expenses. Once you reach age 65, you can use the funds for non-medical expenses (these withdrawals will be taxed as income).

Plus, the HSA is yours to keep—whether you switch employers, change insurance companies or revert to traditional coverage. If you don’t use all the funds one year, they carry over to the next.

You may also save on health insurance premiums by having an HDHP. (People often use that savings to fund their HSAs.) However, an HDHP has relatively high deductibles and out-of-pocket maximums, which potentially exposes you to more financial risk. In 2016, the minimum deductible for an HDHP was $1,300 (single) or $2,600 (family), while the maximum out-of-pocket was $6,550 (single) or $13,100 (family).

Who can have an HSA?
Nearly any adult with an HDHP policy can establish an HSA, as long as you’re not covered by another health insurance policy or enrolled in Medicare. (Things like dental, vision and specific-disease coverage, or employee wellness programs, are allowed.)

What can you pay for with an HSA?
You can use your HSA on qualified medical expenses for yourself, your spouse or your dependents. IRS Publication 502 (irs.gov/pub/irs-pdf/p502.pdf) provides coverage details, but here are some examples: Eligible expenses include ambulance transport, x-rays, vaccines, prescriptions, psychologists and certain over-the-counter drugs.

Ineligible expenses include gym memberships, cosmetic surgery, funeral costs and weight loss programs.

Is an HSA right for you?
In general, an HSA makes the most sense if you’re healthy and rarely visit the doctor. It probably makes less sense if you have a chronic medical condition or expect to need costly medical care in the near-future.

Ultimately, you’ll want to crunch some numbers. Review your healthcare costs over the past few years and calculate the annual savings you’ll get with an HDHP versus a traditional plan. Comparing these figures can help you decide whether or not an HSA is right for you.

It’s also a good idea to talk with your employer’s human resources department about their HDHP options. And review IRS Publication 969 (irs.gov/publications/p969) for more details about HSAs. The more research you do, the more comfortable you’ll feel about your decision—whatever it is. iBi

William J. Phillips is a senior vice president and retail executive for the Illinois Market for Commerce Bank.

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