Lately, my dad's been praising the benefits of having a health savings account. This year, he had the opportunity to get the most of his HSA — bad news for his health, but good news for his wallet (side note: Dad is now doing OK health-wise). If you have one or are considering one, here are all the HSA pros and cons to consider.
But first, if you are looking for the 2016 and 2017 annual contribution limits for HSAs, here you go:
- 2016: $3,350 if you're an individual and $6,750 if you're saving for a family.
- 2017: $3,400 if you're an individual and remains unchanged at $6,750 for families.
I've spent time researching, calculating and mulling over whether an HSA is the best option for me. After a few conversations with Dad, I decided to put together a pro and con list to help me both understand HSAs and decide if I should open one.
First, the basics:
What is an HSA?
An HSA is a highly tax-advantaged account that lets you save money for health-related expenses. It's essentially like an IRA or a savings account for your health. And, after you turn 65, it's even more similar to an IRA, because you can take out money for non-health expenses.
Who can get an HSA?
An HSA is always tied to a High Deductible Health Plan, or HDHP, and many will get them through work. A survey by the Kaiser Family Foundation revealed its mostly larger employers that offer HSAs: Fifty-two percent of firms with 1,000 or more workers offered this type of plan while only 25% of firms with 3 to 199 workers did. What's most important to know here is that you can't have an HSA if your health care comes from an HMO or a PPO — it has to be a high-deductible health plan. The IRS defines HDHPs this way:
“For calendar year 2016, a ‘high deductible health plan' is … a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,550 for self-only coverage or $13,100 for family coverage.”
This should not be confused with a flexible spending account or FSA which can be used in conjunction with a traditional HMO or PPO.
Related >> Readers share their experiences with HSAs
Pros of opening an HSA
Flexibility of uses
You can use money from your HSA to pay for a slew of health expenses, from contact lenses to acupuncture, mental healthcare or a midwife. You might be surprised at some of the things you can buy with your HSA money. HSA Center has a complete list of eligible purchases.
The money you put in the HSA is tax-deductible. Also, the money you withdraw isn't federally taxed, as long as you spend it on approved, health-related stuff. The HSA's interest income isn't federally taxed, either.
Unlike a Flexible Spending Arrangement or FSA, dollars in your HSA can rollover year to year.
You can earn interest
I think the amount of interest I earned recently was something like six bucks. So my initial reaction is whoop de do, but my frugal side reminds me that every little bit helps.
The most obvious benefit of the HSA is that you're funding the future. You're being responsible. The HSA is an emergency fund for your health.
You can take it with you
With an HSA, you can take your balance with you if you leave a company. And if you really hit tough times, you can even withdraw the HSA money to pay for non-health expenses. Of course, you'll be taxed on that — plus, you'll pay a penalty.
After age 65, you can use your HSA savings as retirement money. You're free to spend it, penalty free, on non-health expenses.
Free preventive procedures
Wellness procedures — breast exams, cancer screenings — are usually not subject to the HSA-compatible plan's deductible. Those office visits are covered before the deductible, and often, they're free. Of course, many traditional insurance plans have that same benefit.
Cons of opening an HSA
There are limits to how much you can save. For 2016, you can only sock away $3,350 if you're an individual and $6,750 if you're saving for a family. In 2017, the contribution limit rise to $3,400 if you're an individual and remains unchanged at $6,750 for families. Also, you can't use money from your HSA to pay for your health insurance premium — unless you're unemployed.
Cost of office visits and prescriptions
I compared my traditional Blue Shield plan with their HSA-compatible plan, an HDHP. With the HSA, I'd be responsible for paying the full amount of doctors' visits and prescriptions — until I met the deductible. But the deductible is $6,000 — I'm probably not going to reach that. If I have a couple of non-preventive office visits and prescription expenses a year, the HSA plan would end up costing me several hundred bucks.
Compared to my traditional plan, which requires that I pay $35/visit and $10/prescription (before the deductible), I could actually be spending more for the HSA plan — even considering the tax savings. I suppose it depends on what health issues arise and how much I'm willing to contribute.
Unsurprisingly, like any other bank account, an HSA comes with its share of fees. They vary, but from my research, most seem to have a start-up fee, transaction fee, debit fee, and in some cases, a monthly maintenance fee. Some may even have a minimum account balance fee.
Even though the federal government allows deductions of HSA contributions, a few states don't follow suit. Please check on your state's policy before making any decisions on the tax merits of an HSA. Here's one list of HSA policies by state to consider.
Not meeting the deductible
In all, the health expenses you may have to pay with an HSA plan could outweigh the tax savings. For example, one reader mentioned that the amount he pays in his prescriptions for the year makes the HSA not worth it. If the deductible isn't being met, I can understand that. This seems to be one of those “it depends on the situation” scenarios.
But of course, it's not just about tax incentives — the point of the HSA is also to save for the future. In the end, that seems to be what it comes down to, whether you're using an emergency fund or an account with tax incentives. In my dad's simple but shrewd words: “The bottom line is: save, save, save — as much as possible. Trust me, you will need it.”
If you've passed on an HSA, why wasn't it worth it to you?
What are some other HSA pros and cons?