Health Savings Accounts (HSAs) are relatively new to the health insurance scene so it’s only natural that there’s some confusion about them. What are they? How do they work? Why are they a great option for both saving on healthcare costs and for retirement? How do you know what’s real? You do your research.
To help you understand why an HSA could be a great option for you, post we’ll debunk six of the most common HSA myths. If you have more questions, you can consult our extensive library of content about HSAs and overall financial health and wellness.
HSA Myth #1: HSAs are Expensive
Truth: HSAs can help you save (and even make) you thousands of dollars a year
First, HSAs are free to open and maintain. If you open an account with an administrator like Lively, there are no monthly or annual maintenance fees. There’s no minimum amount to open an account and contributing to an HSA can actually save you money.
How? Well, HSAs are triple-tax advantaged accounts. The contributions you make are income tax-free, so they both lower your tax burden and the effective cost of medical expenses. In fact, by using your HSA contributions to pay for qualified medical expenses like copays, coinsurance, prescriptions and more, you could end up saving up to 30% on said expenses.
In addition, your savings grow tax free whether you invest them or simply collect interest. And if you use your contributions for qualified medical expenses, those distributions are tax-free as well. Additionally, the contributions anyone else makes to your account are tax-free to you as well.
Another great feature of HSAs is the ability to invest your savings. If you invest your contributions in the market, which has an average annual return of 10%, you could build a nice little nest egg over the life of your HSA.
HSA Myth #2: FSAs and HSAs are basically the same
Truth: FSAs have rules that can make them less advantageous than HSAs
Flexible Spending Accounts (FSAs) sound similar to HSAs and on the surface have the same function: to provide people with a tax-free way to pay for qualified medical expenses. But there’s a catch. You must use all the contributions you make to an FSA by the end of the calendar year or else you forfeit anything that remains in your account. Your employer has the option to offer you a two-and-a-half month grace period in which to use your remaining contributions, or to allow you to rollover up to $500 to the following year, but they don’t have to.
HSAs, on the other hand, rollover from year-to-year so you never lose your contributions. This allows you to use it as a true savings account. You also own your HSA so you always have access to your money regardless of whether you’re still with your employer or qualified to contribute to your account.
This brings us to another point about FSAs: they’re employer-owned. So in order to open one, your employer must offer it as part of its benefits package. Any contributions left in your account once you leave your employer or which remain at the end of the year or grace period are absorbed by said employer.
Your employer might offer an HSA as part of its benefits package, but even if it doesn’t, you can open one in the private market as long as you qualify. Which brings us to myth number three.
HSA Myth #3: Health costs associated with an HDHP are too high
Truth: An HSA can actually help you save money on health costs
The name High Deductible Health Plan (HDHP) scares some people, and for good reason. No one wants to get stuck with a large medical bill they can’t afford. But here’s how HDHPs and HSAs work hand-in-hand:
HDHPs typically have the lowest monthly premiums of the health plans. So if you take the money you save every month and put it into your HSA, and then invest those savings, you build a tax-free safety net that you can use for copays, coinsurance, or to pay your deductible outright.
Preventative care like well visits, immunizations, and annual exams are 100% covered under an HDHP prior to your deductible being met. So if you don’t typically use the medical system for anything other than preventative care, you’re unlikely to experience high health costs.
You can use your HSA to pay for medical expenses your health insurance plan doesn’t cover. So there’s no need for a comprehensive health plan.
HSA Myth #4: I’m too young or too old to benefit from an HSA
Truth: Everyone can benefit from an HSA
HSAs were specifically designed to benefit people at all stages of their health journeys. If you’re young, you may not utilize the health system too much outside of preventative care. When you purchase an HDHP, you could save a lot of money on unnecessary coverage. In addition, you have a lot of time to build up your savings so if needed, you’ll have plenty in your account to cover your out-of-pocket costs.
If you’re older, you may feel like you don’t have enough time to add an HSA to your retirement planning. However, starting at age 55 the IRS allows you to contribute an extra $1,000 per year to help you build your savings as you near retirement. In addition, when you use your HSA to pay for medical expenses in retirement the distributions remain tax-free (unlike with an IRA or 401k).
Another little known fact is: if you work for a large company and don’t retire at age 65, you can delay starting Medicare if you want to continue contributing to your HSA.
HSA Myth #5: Medicare makes an HSA in retirement unnecessary
Truth: In 2021, the average couple will spend $300,000 on medical expenses in retirement
Medicare is just another health insurance plan and as such, it doesn’t cover everything. You might have to pay a monthly premium or copays or coinsurance for prescriptions, procedures, and other care. But you can use your HSA to pay for all of these expenses. If you can start an HSA early, contribute to it regularly, and invest your savings, you will have the opportunity to be able to build enough savings so that you can use your other retirement accounts to meet other needs, or maybe even a little fun.
HSA Myth #6: Your dependents can only use your HSA if they’re covered by the HDHP
Truth: You can use your HSA to pay for dependents’ medical expenses regardless of coverage
First, the HSA account holder must be covered by an HDHP to contribute to their HSA. But in the event it makes more sense to buy a different insurance plan, the account holder will still have access to their money.
Second, the only thing the HDHP plan determines is how much you can contribute to your HSA each year. If you have an individual plan, then you’re constrained by the individual contribution limits ($3,600 for 2021). If you have a family HDHP, you can contribute up to $7,200 for 2021. Regardless of the plan you have, you can always use your HSA to pay for dependents’ qualified medical expenses.
There are many benefits to contributing to an HSA no matter where you are in your life, career, or financial circumstance. If you have more questions about how HSAs work or what they can be used for, please check out our extensive library of resources or reach out to your HR department.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.