It’s expensive to stay healthy. The Kaiser Family Foundation says that since 1970, we've been paying more in out-of-pocket medical expenses. In 2016, the average bill was $1,093 per person, up from $119 per person in 1970. If you look at the average person's checking account, that’s money we can't afford to spend.
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Enter the health savings account (HSA). Millions of Americans use HSAs to put money aside for medical expenses, but not everyone is eligible.
Jody Oliver, president and CEO of Infinisource Benefit Services, breaks down the HSA basics:
To qualify for an HSA, you must be enrolled in a high deductible health plan (HDHP). The IRS defines an HDHP as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family. An HSA also requires that you use funds for qualified medical expenses. Generally, that includes expenses such as co-payments, deductibles and monthly prescription costs. But what if you’re healthy and don’t end up needing money to pay medical bills? Oliver says if you withdraw funds for non-qualified medical expenses, not only will you be subject to income tax, but also you may incur an additional 20% tax penalty if you're under 65.
Triple tax benefits
Oliver says HSAs are popular because of their triple tax advantage. If you use a payroll deduction to fund your HSA, you can do so on a pretax basis. When you withdraw funds for qualified medical expenses, you can pull it out tax-free. Your earnings and investments can grow and earn interest over time, which is also tax-free. The primary way most people use HSAs is to save the funds as cash. Oliver says some companies give workers the option to invest in mutual funds, just as you would with a 401(k) or IRA.
There are limits to how much money you can contribute to an HSA. For 2018, the contribution limit for an individual is $3,450 per year. For a family, it's $6,850 per year. Both individuals and employers are allowed to put money in an HSA account. Oliver says more employers are contributing to HSA accounts as a way to attract talent.
Because of rising healthcare costs, more companies are offering high deductible plans and pairing them with HSAs. The health savings account has some advantages not offered by its cousin, the flexible spending account (FSA). Oliver says that with an HSA, the unused balance rolls over into the next year. If you leave a job, the account follows you wherever you go. As long as you have an HSA, you can keep contributing to it. On the other hand, with an FSA, you use it or lose it. In most cases, you’ll lose your FSA with a job change.
Not only can HSAs help save for current medical expenses; it can also pay for future medical expenses in retirement. “Somewhere between $200,000 to $240,000 is the expected healthcare expense of an individual when they are in retirement," says Oliver. "Having a health savings account can really benefit your retirement strategy by having multiple accounts – such as a 401(k), an IRA and an HSA that builds year over year.”
Linda Bell joined FOX Business Network in September 2014 as an assignment editor after more than a decade at Bloomberg News. She is an award-winning journalist/writer of business and financial content. You can follow her on Twitter: @lindanbell.