State of the Saver: How Users Are Saving Money with an HSA

Healthcare needs can quickly add up when you consider deductibles, coinsurance, copays, and items you may need to treat conditions, alleviate symptoms, or prevent complications. All of these expenses can impact your regular budget.

A health savings account (HSA) is a financial account that can help you pay for these expenses. It can save you money in the short term and in the long run. If you’ve been shying away from adding an HSA to your financial tools because the details get a bit confusing, you’re not alone. But we’ve got you! We’re here to simplify the terminology and outline the potential cost-savings strategies.

In this article, we explore how an HSA works, the benefits of an HSA, what an HSA card is, and the various strategies for using an HSA.

An HSA is a financial account. You contribute an amount of your choosing (within IRS limits) from your pre-tax dollars. This helps reduce your taxable income. Then you use the funds to pay for eligible out-of-pocket medical expenses. You can also choose to invest all or a portion of the funds you place in your HSA to grow over time. (More on the various strategies later.)

To be eligible for an HSA, you must have a high-deductible health plan (HDHP). What qualifies as an HDHP changes each year when the IRS defines the minimum annual deductible for individuals and families.

A deductible is the out-of-pocket amount you must pay for medical expenses before your health insurance plan starts to cover them. (But preventive care is covered before you meet your deductible.)

Your deductible resets at the start of each year. This means you have to again meet the deductible amount in out-of-pocket expenses before your insurance starts to cover them—except for preventive care costs.

Now that we’ve got the basic definition out of the way, let’s dig in to how an HSA works.

• Eligibility: If you have a qualifying HDHP, do not have other disqualifying additional coverage, are not enrolled in Medicare, and are not eligible to be claimed as dependent on someone else’s taxes, you can enroll in an HSA.
• Enrollment: Your employer may offer one as a benefit, or you can sign up for one on your own. Enrollment typically occurs as part of your HDHP’s open enrollment period. This is essentially when you are allowed to change your health benefits for the upcoming year.
• Contributions: You make contributions to your HSA from your payroll (before taxes are withheld) if your employer offers this option. If your employer does not offer this or you are self-employed, then you make contributions from your personal bank account. Your employer, your family members, and others can also make contributions on your behalf.
• Using funds: You can use funds to pay for qualifying healthcare costs now or later (even retroactively). You can also save funds for future qualifying medical expenses. And you can even save for your retirement. (More on this below.)
• Funds availability: The funds in your HSA carry over from year to year. This means you don’t lose the money if you don’t use it up by year’s end.
• Portability: The account and funds are yours, even if your employer offered you an HSA as a benefit or contributed to the account. The account is portable through a rollover, meaning you can take the account with you if you switch jobs, retire, or change health plans.

You might be wondering how you access the funds to pay for qualifying medical expenses. This might involve using a debit card.

Most HSAs offer a debit card for you to pay for qualifying healthcare costs directly. However, some accounts may require that you pay out-of-pocket first and then seek reimbursement from your HSA account.

• Debit card: You swipe the card or use the card number to pay for qualifying medical expenses directly from your HSA account.
• Reimbursement: You pay for a qualifying medical expense from your regular checking or savings account (or with a card). Then you reimburse yourself by transferring funds from your HSA to your usual bank account.

Now let’s get into the benefits of having an HSA, along with the various strategies for saving or using your funds.

“There are clear benefits to opening and using an HSA,” says Scott Maurer, a certified IRA professional and the vice president of sales at Advanta IRA. “The triple tax advantage and the distribution rules, which support both short-term and long-term financial strategies, make participating in an HSA a very attractive move. There is practically no downside, but an individual does have to participate to get the benefits.”

Triple tax advantage:

• Your contributions to an HSA do not get taxed. If you make contributions directly from your payroll, those contributions are taken out of your paycheck and placed in your HSA before your employer withholds income tax and payroll tax. If you have self-employed income, your contributions to an HSA are tax deductible when you file your taxes.
• Your contributions grow tax-free. You can invest your HSA funds in stocks, mutual funds, and more. This growth isn’t subject to taxes.
• Your withdrawals are tax-free. You can withdraw money from your HSA to use for qualifying medical expenses without paying taxes on the amount. After age 65, you can withdraw money from your HSA to be used for any reason. But nonmedical expenses are taxed like regular income at that point.

These three tax advantages mean you have various strategies for saving money with your HSA. Now we’ll look at three saver strategies and how they work. Note that you can mix and match these strategies or switch from one to the other at any time. That’s part of the benefit of an HSA. It’s a flexible financial product that can help you save money for when you need that cash the most. That may be now or later.

Whichever strategy or combination you choose, just be sure to maintain all the proper documentation, such as receipts, and follow IRS rules as well as your individual account’s rules.

This strategy involves estimating your medical expenses each year and setting up contributions to cover qualifying expenses.

You can automate contributions, either through payroll with your employer or by setting up automatic transfers from your checking account. Then, any time you have a qualifying medical expense, you use the funds to pay for the expense directly or through reimbursement.

“Distributions for qualified medical expenses are tax-free and can take place at any age,” Maurer says. “This means that an individual can pay for medical expenses with money that is not taxed.”

He explains the basic savings strategy: “The individual’s income tax rate is the percentage that they save on medical expenses,” he says. “For example, if a person is in the 24% income tax bracket, and contributes to their HSA on a Tuesday, then goes to a doctor on Wednesday and pays the bill using their HSA, they have effectively saved 24% on that doctor visit when compared to not using their HSA.”

This strategy involves paying for your qualifying medical expenses with a regular checking account, savings account, debit card, or credit card.

Then you can choose whether you want to take a distribution from your HSA funds to reimburse yourself. “The distribution can take place at the time of service or any time thereafter, up to a year after the HSA owner’s death,” Maurer explains.

Why might you hold off on taking a distribution right away? You might anticipate that you will have higher healthcare costs later and that you will potentially have less income in the future, such as in retirement. You might also choose to pay for minor out-of-pocket expenses that fit your budget now and save for when you have a bigger expense.

“Money contributed to an HSA can be invested to create earnings for the account,” Maurer explains. “These earnings are not taxed as they accrue, and they are eligible to be distributed tax-free for qualifying medical expenses.”

The growth on the investments can help you manage a lifetime of medical expenses, he adds.

This strategy involves saving all funds and investing them and paying out of pocket for all your medical expenses rather than taking HSA distributions.

“If one is lucky enough that the HSA is not needed for medical expenses,” Maurer says, “there is still a beneficial financial strategy to utilize. After turning 65 years old, distributions from the HSA that are not related to qualifying medical expenses are taxed but not penalized. The distribution is taxed at the individual’s income tax rate in that tax year, just like a traditional IRA, but there is no penalty.”

“Qualifying medical expenses” is a broad term. It includes things like deductibles, coinsurance, copays, and prescription medications. Those are straightforward qualifying medical expenses.

But you might be able to purchase some unexpected items or services with your HSA or FSA dollars. For example, a new mattress or a piece of home gym equipment, such as adjustable weights, might be eligible expenses for an HSA if you’re using the product(s) to address a specific medical condition. If approved by an independent licensed clinician, such conditions might include back pain (with the mattress example) or physical rehabilitation from an injury (with the adjustable weights example).

You might need a letter of medical necessity (LMN). An LMN is a formal document from a licensed healthcare provider that explains why a certain product, treatment, or service is necessary to treat, mitigate, or prevent a medical condition.

Certain health products and services may be eligible for qualified customers with an LMN issued by an independent practitioner when the item is used to address a specific medical condition.

Truemed* specializes in helping you maximize your HSA and other health-related benefits (such as an FSA):

• First, you can check whether a product or service is normally considered a qualifying medical expense or whether you might need an LMN.
• Complete a health intake survey that will be reviewed by an independent licensed clinician.
• Buy the item; either pay directly with your HSA/FSA card at checkout, or pay with a regular credit/debit card and seek HSA/FSA reimbursement afterward.
• The independent licensed practitioner will review your medical history, and if you qualify, will issue an LMN. Truemed itself does not make eligibility determinations.
• Truemed also offers support in the event you get a denial of reimbursement and need to provide substantiation documentation.

*Truemed is for qualified customers. HSA/FSA tax savings vary. Learn more at truemed.com/disclosures