Short answer – No, an HSA is NOT health insurance.
Health insurance is provided by an insurance company for which you pay monthly premiums. When you have day-to-day medical expenses, or if something unexpected happens and you need to visit the doctor or hospital, they help you pay your health care costs.
A Health Savings Account (HSA) is NOT a health plan. It’s a tax-free savings account designed to help you pay less for out-of-pocket healthcare expenses associated with HSA-qualified health plans.
With that out of the way, let’s dive into why the HSA may be useful to you and your family.
A Story About Deductibles and Medical Bills
A deductible is the amount of money you must pay before your health insurance starts helping you out. Let’s say you have a health care plan which has a $2,500 deductible. For the sake of this example, we are going to ignore coinsurance and out-of-pocket limits.
This means if you have an accident and need an x-ray and the bill is $300, you have to pay for that out of your own pocket. Now imagine you get really sick and have to pay for special lab tests and medicine a month later. The medical cost for this will be $500 and you will still have to pay for that out of your own pocket.
But three months later, your streak of bad luck continues. Let’s say you get into a car accident and hurt your head fairly badly and the doctor wants you to get an MRI to ensure that you’re in the clear.
Your bill for the MRI comes out to be $2,200. Would you have to pay for that all out of pocket?
No, you don’t. This is because you have reached your deductible limit. Let’s do the math:
X-Ray ($300) + Lab Tests ($500) = $800
So far you’ve spent $800 out-of-pocket. If your deductible is $2,500, the amount remaining on your deductible is $2,500 minus $800, which is $1,700.
This means for your MRI scan, you’ll have to cough up $1,700, while your insurance provider will pay the remaining $500.
If you get into any accidents for the rest of the year, your insurance provider will pay for most of it, as you’ve gone over your deductible.
Please note that most health plans have coinsurance, which kicks in after you meet your deductible. With coinsurance, you pay a percentage of your costs after your deductible is met.
If your coinsurance is 80/20, this means the health plan pays 80 percent of costs after the deductible is met, and you pay 20 percent. Your annual out-of-pocket maximum is the most you would pay in any given year. It’s a combination of your deductible plus the dollars you pay during the coinsurance phase of your plan.
How an HSA is Useful
That example was important to illustrate the impact of out-of-pocket healthcare expenses.
Even with health insurance, you will still need to pay a large chunk of money when you have medical expenses.
There are two ways around this:
- Option 1: Purchase a health plan that has high premiums but a lower deductible. By choosing this option, you will still be responsible for paying for your deductible.
- Option 2: Choose an HSA-qualified plan and save up tax-free money in your HSA to pay for your share of medical expenses. You have the option to use those funds in an emergency, or choose to use them on any qualified expenses. You also have the flexibility to pay for your medical costs out-of-pocket, save your receipts on the Lively App, and reimburse yourself anytime in the future.
Here’s an example comparing a traditional low deductible plan with a high deductible plan. If you take your premium savings and deposit them into your HSA, you can use those “free” funds to pay your share of qualified medical costs. If your plan is through your employer, you may also get an HSA contribution from them—additional free money to help you build your HSA balance.
|Traditional Low Deductible Plan||High Deductible Plan with an HSA|
|Co-insurance after deductible||10%||10%|
|Premium Savings Contributed to HSA||$0||$1,900|
|Employer contribution to HSA*||$0||$800|
|Total “free” money in your HSA||$0||$2,700|
*Example only; not all employers make HSA contributions on your behalf, and if you don’t get your health plan through your employer this option is not available to you.
If you’re a bit confused about what these terms are, or how they all fit together, we explain them and talk more about how coinsurance and deductibles work here.
An HSA helps you lower your out-of-pocket expenses through tax-free deposits into your account. Use your HSA to cover your share of costs with the high deductible plan option (assuming it’s HSA-qualified). Keep in mind you own your HSA and the funds never expire—there’s no use-it-or-lose-it rule—so you can spend the funds anytime from today through retirement.
If you don’t spend all of the money in your HSA in any given year, the funds roll over year after year, allowing you to build a safety net for future and unexpected expenses.
You can also use this account to prepare for retirement healthcare costs with your HSA, knowing that if you don’t spend the funds on health costs in retirement, you can withdraw them penalty tax-free after age 65 and pay for anything you want with your HSA savings. You will just have to pay regular income tax with withdrawing funds from your HSA.
Remember your healthcare provider will only start helping with your bills after you’ve paid up to your deductible.
We talk more about the tax advantages of the HSA here.
Spending from your HSA: How can I reduce my out-of-pocket expenses?
HSAs help you lower your out-of-pocket costs because of the built-in tax advantages.
Your HSA contributions are tax-deductible from your income tax, meaning you can lower your tax burden with every dollar you deposit. If you have the option to contribute through paycheck deductions from your employer, you save even more by avoiding payroll taxes.
The interest you earn on your HSA is also federally tax-free, meaning you can grow your savings for future expenses or when you retire. If you set up your HSA with a financial institution that allows you to invest your contributions in mutual funds, then the dividends you get are also free of federal taxes.
You can withdraw from your HSA to spend on qualified medical expenses without paying tax. Spend your HSA contributions on medical expenses including your deductible, any copays, prescriptions, and coinsurance for medical services such as the doctor or hospital. Don’t forget HSA funds can be used on other expenses not tied to your health plan, such as dental care, vision expenses, and the chiropractor.
For more examples of what you can and can’t spend your HSA on, look at IRS publication 502 or talk to your tax advisor.
While an HSA is not a form of health insurance, it is a great complement to your HSA-qualified health plan. Use it to save on out-of-pocket medical expenses and as a potential supplemental retirement fund as well. By funding an HSA, you gain the benefit of financial flexibility in how you use the funds, the ability to keep your unused balance year after year, and substantial tax benefits. If you haven’t done so already, sign up for an HSA – it’s free for individual users! →
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.