How Health Savings Accounts Works
March 29, 2019 | By Daniel Dewitt
Health savings accounts are a lesser known, but powerful tool for handling medical expenses. And considering the cost of healthcare is the #1 cause of bankruptcy in the US today, we really can’t afford to leave any tools out of our toolbox. That’s why we’ve put together this article today; to help you understand and use health savings accounts to their fullest potential and hopefully keep you from joining the millions that go into bankruptcy because of their health.
What Is a Health Savings Account?
Put simply, a health savings account is a financial tool where you put money into a fund that can later be used to pay for healthcare costs. Why would you do this? The reason is that the money you put into the account isn’t taxed, which means that you’re essentially putting in a little extra each time you add to the account. In this way, they’re much like social security or a retirement plan except when you spend the money in them you aren’t taxed.
How Is a Health Savings Account Different Than a FSA?
A flexible spending account (FSA) is another financial tool offered by employers sometimes that allows you to pay for healthcare without taxes. Healthcare.gov describes them as:
A Flexible Spending Account (also known as a flexible spending arrangement) is a special account you put money into that you use to pay for certain out-of-pocket health care costs. You don’t pay taxes on this money. This means you’ll save an amount equal to the taxes you would have paid on the money you set aside. Employers may make contributions to your FSA, but aren’t required to.
Superficially they resemble health savings accounts, but FSAs are far less versatile and there are a few key differences. First, they’re not transferable from one job to the other: get fired? Tough, you’re going to have to start from scratch at your next company. Second, FSAs don’t roll over year to year like health savings accounts do.
Where Can I Get a Health Savings Account?
Often your employer will offer a health savings account that you can contribute to, but even if they don’t, you can still get one from your local bank. It’ll require a little more leg and paperwork on your end, but if your employer doesn’t offer one it’s your only option to take advantage of the financial benefits you can reap from a health savings account.
Unfortunately, there’s one major hitch to qualifying for a health savings account. And that’s why you have to already be enrolled in a high deductible health plan (HDHP).
What Is an HDHP?
A high deductible health plan is one that has a minimum deductible ranging from $1,000 to $3,000 depending on whether it’s individual or family coverage. This deductible has to be paid out of pocket before your insurer starts chipping in, but once your expenses hit around $6,000 it’s a hard cap where you no longer have to pay out of pocket. HDHPs can be offered both through your employer, the insurance exchange of the ACA (Obamacare), or pursued privately.
The connection between HDHPs and health savings accounts makes the prospect of investing in a health savings account tricky. Is it worth the tradeoff of being part of an HDHP (if you aren’t already)? Ultimately it depends on a couple of factors.
The first thing to consider is whether you have the ability to even enroll in an HDHP in the first place. Some employers don’t offer it as a plan, while others do: those that do often will contribute at least partially to your health savings account because HDHPs cost less money than a commiserate healthcare plan.
Health Savings Accounts by the Numbers
Key to making any financial decision is to understand the numbers at play. And while every decision will ultimately depend on the personal factors at play, it can be useful to understand the greater context within which other people make the same decision. This study summarizes some generalized findings on health savings accounts:
HSA investment assets approach $10 billion. Backed by a strong market, HSA investment assets reached an estimated $9.8 billion at the end of June, up 45% year over year. The average investment account holder has a $16,007 average total balance (deposit and investment account). Fewer unfunded accounts. Less HSAs (15%) were unfunded at the midway point of 2018 compared to 20% at the same time in 2017… Employer relationships are the largest driver of account growth. Direct employer relationships are the leading driver of new account growth, accounting for 42% of new accounts opened in the first half of 2018.”
As you can summarize from the above, health savings accounts are an overwhelmingly common way of planning ahead and abrogating future healthcare costs.
Is a Health Savings Account Right For You?
This is the question that 90% of the people reading this article are interested in knowing, but unfortunately, it’s not something we can give a definitive yes or no, on. In general health savings accounts are a solid investment as it’s inevitable that at some point we all have to pay money to maintain our health, but not all of us have the money to squirrel away money in a fund. Most Americans in fact barely make enough to cover their bills on a monthly basis and some have installment loans to tide them over.
The best way to decide if a health savings account is right for you is to calculate your healthcare costs over the last few years, average it by month, and then invest that much each month in your health savings account. This will hopefully ensure that you won’t be over investing, but still, avail you of most of the advantages of a health savings account.