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How does a Health Savings Account (HSA) work?

6 min read

30 sec brief

This is a continuation of our recent series about all things HSAs. If you need to get caught up, check out What is an HSA and What are the benefits of an HSA?. Using an HSA can be a simple 1-2-3 process if you know the right sequence. Let us show you the easiest way to get an…

This is a continuation of our recent series about all things HSAs. If you need to get caught up, check out What is an HSA and What are the benefits of an HSA?. Using an HSA can be a simple 1-2-3 process if you know the right sequence. Let us show you the easiest way to get an HSA working for you.

Quick Refresher: HSA 101

An HSA or Health Savings Account is a personal savings account for health expenses. In more technical terms, an HSA is an interest bearing savings account that can be used for health-related expenses with contribution limits set annually by the IRS. Think of it like a 401(k) for healthcare. You can use the money for all qualifying health related expenses. Got it? Great! But how can you add money to your HSA?

How to Add Money

Once you have opened an HSA, you can add your contribution amounts. Please note, contribution limits are set annually by the IRS. In 2017, HSA  contribution limits are $3,400 for individuals and $6,750 for families. Here are the ways you can contribute:
  • Payroll Contributions – This is the best way to contribute to your HSA, but will require an employer-provided HSA plan. It’s an automated way to create a recurring contribution. Once you set it up, there is nothing to worry about. In addition, triple tax advantages (tax-deductible contributions, tax-free interest and tax-free withdrawals (for medical expenses))  mean you can use tax-free money from your HSA to pay for health expenses.
  • Individual Recurring Contribution – Similar to payroll contributions, these are fully automated. Different from payroll contributions, these pull directly from your bank account. While you won’t incur all of the tax benefits of payroll contributions (paycheck by paycheck vs. all at once during tax time), it does provide a dedicated savings account for all your health expenses.
  • One Time contribution – You can quickly and easily make a one-time payment from your next paycheck or directly from your bank account. It’s nice to know you have the flexibility to contribute when it is most meaningful for you!
  • Catch-up contributions – These are limited to individuals 55 years or older. Like the standard HSA contribution limits, these are set annually by the IRS and are $1,000 for 2017. If you qualify, You can add these as part of your recurring contributions or can opt for a one-time contribution. Catch up contributions provide an extra opportunity to save for health costs in retirement. Did you know, even with Medicare, average lifetime health expenses for retirees are $250,000?
  • Employer contribution – if you are one of the lucky ones, your employer is making contributions to your HSA. Please thank your HR team or leadership for their generosity. They are providing you financial health security for years to come. Please note, all contributions (individual and employer) are subject to the same annual HSA limit, set by the IRS.
Did you know, HSAs are not limited to the “use it or lose it” structure of FSAs. With an HSA, you can save money for your health expenses for this year and in years to come. You own your HSA account and can take it with you as you change jobs or HSA providers.
 

How to Use your HSA

  • Debit card – most HSA platforms provide individuals with a debit card to easily pay for qualified health expenses like doctors visits, prescriptions, etc. At Lively, we provided a Lively branded MasterCard and you can review all of your expenses in our dashboard.
  • Receipt upload/reimbursement – if you make a purchase without your HSA debit card, you can reimburse yourself for the out-of-pocket expense. Simply upload your receipt into your HSA dashboard. (Note – this might not be universally true with all HSA providers, but it sure is at Lively.)
  • Bulk reimbursement – one neat feature of an HSA is the ability to save your qualified receipts and create a larger bulk reimbursement. Not a bad way to save for that new electronic or exotic vacation! You are allowed to submit qualified receipts for as long as you have had an HSA.
  • Save for later – HSAs offer some very unique flexibility. While this might be obvious, you don’t have to use an HSA to pay for health-related expenses. You can save all of your HSA money, pay for medical expenses out of pocket and treat it like a 401(k). An HSA can provide retirement money in addition to health savings. After 65 years of age, you can use your HSA for anything, not just qualified health expenses. This is a great way to take advantage of those triple tax benefits if you have limited health expenses or the financial means. What a great perk!

Interest, Growth & Long Term Value

What has not, been apparent is that your HSA is an investment account. As such in addition to your contributions (via payroll or otherwise), Interest will accelerate the long-term value of your HSA and your overall retirement wealth. In that way, an HSA is the only health tool that helps provide financial investment opportunities over the long term. If you want to see what this looks like, check out this handy calculator we created, to see the value of your account today and in the future.

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.

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