Q&A with a CPA: HSA Accounts
Q: My dad told me that I’m crazy if I don’t opt for the HSA option for my insurance, but I don’t understand why. Doesn’t it cost me more because of the high deductible?
KCL, CPA: This is an awesome question because I used to think the SAME THING. For years I chose the HMO option because as long as I stayed in network, my out-of-pocket costs were minimal and the premium wasn’t bad either. But last year when my employer decided to pass along more of the premium for the HMO and make the HSA option totally free, I took another look. My only regret is that I didn’t do this sooner!
The beauty of the HSA, to put it simply, is that it strips taxes from the money I spend on healthcare including for things I already buy like contact solution, co-pays on prescriptions and even when I get my teeth cleaned. These expenses become TAX FREE. If I had the HMO option, I’d still have to incur these expenses, but they would be after tax (unless my medical expenses were more than 10% of my income, which really only happens when you get really sick or you make very little money). In other words, if I spend $500 each year on these things, by using the HSA I am saving almost $100 in taxes.
You might argue that the same thing applies if you have an FSA account, which is true. It works the same way in terms of allowing you to pay for out-of-pocket medical expenses with pre-tax money. Except that the FSA is “use it or lose it,” meaning that if you don’t spend all the money in the account on medical expenses by a certain date each year, it goes away. The HSA account is mine-all-mine AND my employer even puts money in there for me! And as long as I spend the money in the account on medical expenses someday, I’ll never pay taxes on that money. Any money that’s left when I turn 65 I can spend on whatever I want (although I will have to pay income taxes on withdrawals). So in a way, it’s also another way to save money for the long-term if I stay healthy. Did I mention the employer match? Yep, free money.
The caveat to selecting an HSA is that you do have to meet a deductible each year before you’ll have any insurance coverage, which means you should have money set aside in case something happens. Annual “wellness visits” are fully covered as mandated by federal law, but if you go to the doctor for a sinus infection or you break a bone and have to go to the ER, you’ll have to pay for the full expense up to the amount of your deductible (mine’s $1,500).
Once you hit the deductible, your co-insurance kicks in, which means your insurance covers a percentage of the cost (typically 80 percent) up to another cap ($1,500 again for mine). What it comes down to is this: my total annual risk by selecting an HSA is $3,000. Once I’ve spent $3,000 out of pocket on medical costs each year, everything is covered. (your plan may have different numbers, so check it) But if I don’t incur any medical costs (I don’t get sick, I don’t break anything, etc.), then I don’t have to spend anything. And the money in my HSA just grows and grows. Which is awesome because it comes right out of my paycheck and I don’t even know it’s gone. But I have this nice pot of money that’s there to cover me in the unlikely case I’ll need it. And in the meantime I can use it to buy new glasses, contacts and for other routine costs I already incur.
A couple things to note about HSA’s though: YOU are in charge of making sure you can prove that any money you withdraw from the HSA is really a qualified medical expense, and the IRS likes to do little check-in audits on these accounts. So make sure you keep your receipts and records! And the annual limit for contributions in 2014 to an account is $3,300 for individuals or $6,550 for an entire family.