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Top 5 Reasons to Own a Health Savings Act

It’s that time of year again, Santa Claus, gift giving and selecting new benefits for the upcoming year.  As physicians, most of you know about health savings accounts.  However, I want to give you some more details on how valuable they truly are.

Normally, employers offer PPO or HMO medical plans; however, a new plan is becoming more popular among organizations.  These plans are called High Deductible Health Plans or HDHPs.  HDHPs offer higher deductibles that must be met before the plan starts covering many medical expenses.  The primary benefit of HDHPs is the accompaniment with a Health Savings Account or HSA.  Many people do not know what an HDHP or an HSA is.  There are many benefits to enrolling in this plan.  Below are the top five reasons to own a health savings account.

How does it work

Health savings accounts were established in 2003 by the Medicare Prescription Drug Improvement and Modernization Act.  The act was designed to help individuals save for future healthcare expenses.  Since then, over $100M has been contributed to HSAs.

They work like a bank account.  You contribute money to the account, receive a debit card, and swipe it when you have a qualified medical expense.  Also, you can reimburse yourself if you pay with other means like cash, check, or your credit/debit card.

A health savings account should not be confused with a Flexible Spending Account or FSA.  An FSA is for one calendar year and is “use it or lose it.”  An FSA allows you to take pre-tax funds, load them on a card, and use it for non-covered health expenses in one year.  If you do not use all the funds, you lose them.  An FSA takes much more time to determine the correct amount to fund annually.  An HSA is for life.  Once you open an HSA and fund it, you can use the funds at any time.  Also, health savings accounts have beneficiaries.  Here are five reasons to own a health savings account.

Reason #1 – Lower Premiums

One of the first benefits you will notice when comparing an HDHP to other medical plans is that the premiums are much lower.  HDHP’s premiums are lower since the deductibles are higher than normal PPO or HMO plans.  Insurance companies do not have to cover as many medical expenses, so they give you a lower premium.  The same is true for auto collision and comprehensive coverages.  If you raise the deductibles, you will pay less in premiums.  If you are healthy, you could save money on premiums.

Reason #2 – Pre-Tax Contributions

Most companies will allow you to set up contributions to your health savings account once you sign up.  The maximum you can contribute to an HSA depends on whether you have an employee-only HDHP or a family HDHP.  Employee-only plans can contribute up to $3,650 annually, with an additional $1,000 if you are over 55.  Family plans allow contributions up to $7,300 annually, with an additional $1,000 if you are over 55.  The best part is that your employer can contribute to your HSA pre-tax.  An HSA mimics a 401(k) or pre-tax employer retirement plan.  Wages go in without you paying taxes.

Reason #3 – Tax-Free Growth

You might be asking, “If an HSA is like a regular bank account, why would I get one in the first place.”  The reason is that you can invest your contributions.  Only 9% of people who own an HSA invest their funds.  Investing money is one of the main reasons for getting an HSA.  The investments grow tax-free.  In essence, an HSA resembles an IRA or 401(k).

Reason #4 – Tax-Free Withdrawals

When you withdraw money from your health savings account, the money is tax-free when used on qualified medical expenses.  An HSA has a wide array of qualified medical expenses.  There are not many medical expenses that an HSA does not cover.  Essentially, an HSA is a triple net tax-advantaged account.  If you follow the process above, you will never pay taxes on the contributions to a health savings account.

Reason #5 – Income Tax Deduction

The last benefit will feel like the best.  You can deduct the contributions to the HSA from your income for federal income taxes.  There are no income limits for this deduction.  You or your CPA will need to fill out Form 8889.  The contribution amount goes up almost every year.  For 2023, the contribution limits are Employee only – $3,850 and Family – $7,750.  If you are over age 55, you can still contribute an additional $1,000.

To Conclude

There are many benefits to owning a health savings account.  If you are healthy, young, or do not spend much time at the doctor, you should consider an HDHP with an HSA.  It is another investment vehicle that will directly help pay for expenses in retirement, much like an IRA.  If you do not have an HDHP, you cannot contribute to an HSA.  That is one major limitation.  However, once you have opened and funded an HSA, you can invest and use it for life.  Please get in touch with us if you have any questions about your employer benefits and if an HSA is right for you.

About The Author

Jordan Benold, CFP® provides fee-only financial planning and investment management services in Frisco, TX.  Benold Financial Planning serves clients as fiduciaries and never earns a commission or sells a product.

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