An HSA offers unparalled tax benefits, but those benefits are only available to you if you are covered by an HSA-Qualified plan with certain deductible and out of pocket maximum limits (HSA Limits Chart). This designed to expose you to the day to day costs of health care through the high deductible, but also to protect you from runaway costs if you have a chronic disease or have a serious accident.
You not only need the “right” coverage, but must avoid the “wrong” coverage. The wrong coverage is anything that covers expenses under the mandatory deductible. Examples include, Medicare, Medicaid, Tri-Care, recieving non-preventive benefits from the VA or Indian Health Services, and Health FSAs not limited to dental and vision expenses. Anything coverage that you from the first costs of your care is forbidden – it is that insight into the actual costs of your care that cause most in HSA plans to engage more deeply in your day to day health care decisions.
Once the money is placed in the account, the rules change. Insurance coverage no longer matters. You may use the money in the HSA to spend on eligible medical expenses (see Eligible Expense List) for yourself, your spouse, and your current tax dependents for the rest of your life.
If you get your health insurance through your employer, the health plan or employer will often offer to open an an account on your behalf, often paying the fees and/or contributing money directly into the account for your use.
You do not have to open an account in this manner, or at all, but it is usually wise to do so to take advantage of the tax savings and of the free resources your employer offers. You have the right to open an account anywhere you wish and can transfer money tax-free between account anytime you wish. If you leave your employer, you may change HSA Trustees or leave the money in the account your employer arranged, but you may need to pay your own fees.
Many people use only the money their employer contributes or think if the account as a replacement for an FSA focused on only one year of expenses. In fact the HSA is all this and much more, a powerful tool to save for future health care expenses.
I strongly recommend that you reinvest the savings from the premium (which is generally lower due to the high deductible) and place that into your account to help meet expenses later. You should save as much as you can, up to the published limits each year if you can afford to (see HSA Limit Chart). In fact, the HSA offers the best tax free benefits among any investment vehicle, as deposits are tax-free, growth is tax-free and withdrawals for medical expenses are tax-free for life. In addition, deposits may through payroll are free of FICA taxes.
Once the accountholder turns 65, the account can be used for any purpose if you wish, but must be taxed at your current tax rate at the time, the same tax treatment as withdrawals from an IRA or 401-k plan, but without minimum required withdrawals or income phase-outs.
Many people new to HSA plans and accounts have trouble visualizing how the account will work. It is fairly simple. It is at its heart a bank account with a debit card or bill pay for spending and interest or investment options for saving.
You generally do not use your debit card at the point of service, but rather run the expense through your insurance company to gain the network discounts and pay with your card or bill pay once the final amount owed has been determined. In some cases such as pharmacy or simple office visits the payment may be required immediately.
Your Health Savings Account is owned by you, even if your employer makes deposits into it. Think of it like your paycheck, once the money is deposited into your account it is your to keep and to decide how to spend. If you spend the money on qualified medical expenses (see HSA Eligibile Expense List), the money remains tax free.
This is one of the most powerful aspects of the HSA account, the ability to invest in mutual funds or other investment options to take more risk consistent with long-term growth. Investing is always optional and you will generally be allowed to choose from a variety of investment options with different risks and reward structures.
Most HSA Trustees offering investments will require a minimum amount to be kept in the account for working capital to pay medical bills from the account, as the investments generally need to be sold with some lead time before being trasferred back to the spending portion of the account.
Because money in the HSA account continues to grow tax-free and there is no time limit for withdrawals, many people deliberately pay for eligible expenses with other funds, effectively setting up a future tax-free withdrawal anytime in the future. In this case, keeping track of reciepts is very important, because at the time the money is withdrawn, especially if withdrawing a large sum from many years, you could be subject to an audit by the IRS to prove that you have spent the money on eligible expenses. Many leading HSA trustees offer tracking services to monitor expenses over time and take pictures of reciepts for safekeeping. To search for HSA accounts with this and other differentiating features, I recommend HSASearch.com