Health Savings Account Basics
When it comes to medical care, bills can add up quickly. While most people do their best to stay healthy, sometimes a trip to the doctor can't be avoided. After retirement, avoiding medical expenses becomes even more difficult, so much so that you may have concerns about how you would be able to afford any large medical bills if you or a loved one should become seriously ill.
If you face some of these concerns, a health savings account (HSA) may be able to help. Here, we've provided some basic information about HSAs so that you can prepare for future medical expenses and avoid future worrying.
What Is a Health Savings Account?
At its core, a health savings account is a savings plan. An HSA is specifically intended to work with HSA-qualified High Deductible Health Plans (HDHPs) so that individuals can cover medical costs. An HDHP is a form of health insurance that requires smaller scheduled premium payments in exchange for higher deductibles. While HDHP participants may enjoy paying lower premiums than typical policyholders, they may also have to pay higher out-of-pocket expenses to satisfy their deductibles before the insurance plan will provide coverage.
To be able to enroll in an HSA, you must:
- Be Enrolled in an HDHP
- Not Participate in Medicare
- Not Be Listed as Another Person's Dependent
- Have No Other Form of "First Dollar" Expense Coverage (Note: Any coverage that pays the entire expense of a service or treatment without requiring out-of-pocket payment is considered "first dollar" coverage.)
How Does a Health Savings Account Work?
HSAs are easy to set up and easy to maintain. They can be established at any financial institution that is not your HDHP provider. Banks, insurance providers and credit unions are all eligible to help you establish your HSA.
An HSA is very similar to a Traditional IRA in a number of ways. An individual or an individual's employer can make HSA contributions up to a certain limit every year once an HSA has been established. Participants who are 55 years of age and older can also make catch-up contributions up to a certain amount (depending on the current year's limit). Contributions to an HSA are also tax-deductible.
Unlike contributions made to flexible spending accounts (FSAs), contributions made to HSAs have no expiration date. Your funds will stay in the account regardless of life changes and will grow tax-free for as long as the account remains active. Furthermore, you decide when and for what expenses to use your funds. Withdrawals for eligible medical bills can be made tax-free, and while most services and over-the-counter medications qualify, you should read the fine print of your HSA agreement to be sure.
If you have concerns about your future medical expenses, an HSA can help you prepare, one small contribution at a time. As you consider whether a health savings account may be right for you, talk to your employer, your local bank or another trusted financial provider for more information.