Health Savings Account Pros and Cons

Last modified: May 14, 2021

Interested to learn about health savings account pros and cons? You have landed at the right place! But let’s first get to know more about the health savings accounts.  

A health savings account or HSA is similar to personal savings account that lets you put aside money to cover qualified medical expenses and reduce your taxable income. With a health savings account, you can pay deductibles, coinsurance, copays and save money on overall healthcare expenses.

Let’s find out all the ins and outs of HSA in our review.

What Is a Health Savings Account?

So, what is an HSA medical plan? Simply put, it’s a health savings account that allows you to save money on a pre-taxes basis. To qualify for HSA, you need to have insurance with a high-deductible health plan (HDHP). For 2021, a qualifying insurance plan for an individual must meet a deductible figure of $1,400, while for a family, it’s $2,800.

An HSA is a flexible account without any yearly limit, so whatever amount you have available, it continues to grow tax-free. You can use the tax-free money for medical purposes whenever you want — even after retirement. The health savings account definition is simple, but the eligibility criteria are not (we’ll discuss that later). 

You can be entitled to HSA coverage only if you use qualified medical services. Here are some of them defined by the IRS:

  • Ambulance                   
  • Breast pumps
  • Flu shots
  • Preventative care
  • Prescription drugs
  • Menstrual care products 
  • Vision and dental care
  • Speech and physical therapy
  • Vaccines
  • Medical equipment
  • Doctor’s visits
  • Psychiatric care
  • Midwife
  • Vasectomy 
  • Surgery 
  • Lactation supplies
  • Infertility treatment
  • Special education services
  • Laboratory fees
  • Guide dogs
  • Personal protective equipment (PPE)
  • Long-term care

However, there are a few healthcare services that are not considered qualified, including: 

  • Cosmetic surgery
  • Nursing care for a healthy baby
  • Teeth bleaching

How Does HSA Work?

The money deposited into your HSA is pre-tax as it is not considered your income. You can open an HSA account through your employer, but you have to follow the health savings account rules requiring you to enroll in a high-deductible health plan and not have Medicare coverage. 

The question off the top of your head maybe, “Can I open health savings account on my own?” The answer is yes. Self-employed individuals can also get an HSA if they have a high-deductible health plan. 

Currently, the annual contribution limit to an HSA is $3,600 for self-only and $7,200 for a family. Another $1,000 can be contributed at the end of the year if you are over 55 years old.

High-deductible health plans also have out-of-pocket maximums. In 2021, the maximum for an individual is $7,000, while for a family, it’s $14,000.

HSAs offer a lot of flexibility. When you open an account, you often receive a debit card, which simplifies paying for medical expenses. HSAs are also transferable, so don’t worry if you change jobs or retire — you will still have access to your account.

Health Savings Account Pros and Cons 

What Are the Advantages of an HSA? 

HSA benefits include:

Triple Tax Benefits 

HSA offers a triple tax advantage which is perhaps the HSA biggest benefit. They are:

  1. Money contributed to your HSA is not taxed.
  2. Funds in your HSA grow tax-free.
  3. Qualified medical expenses are tax-free.

Save on Your Medical Expenses

Using a health savings account, you can pay for qualified medical services, deductibles, coinsurance, copays, and other out-of-pocket expenses and healthcare services not covered by your current plan. However, if you use your HSA for unqualified medical services, you will have to pay taxes along with a penalty. 

Invest Your HSA Funds 

You can invest your HSA balance in stocks, mutual funds, and bonds. The money in your HSA is tax-free, which means you can increase your earnings. 

Penalty-Free Withdrawals for People Aged 65 and Above

Want to save for retirement? Consider opening a health savings account. 

After turning 65, you can withdraw cash for any medical or non-medical purpose without a 20% penalty. However, the distribution won’t be tax-free. You can also pay for other medical services with your HSA, including premiums for Medicare Part B. 

Contributions from Your Employer

One of the most significant HSA benefits for employees is that their employers can contribute to the HSA, but they should keep the annual limit in mind. The biggest HSA benefit for employers is that they can save on health insurance premiums without compromising employee coverage quality. 

No “Use It or Lose It Policy”

Unlike other healthcare plans, health savings accounts are not subject to the “use it or lose it” policy, which means that there’s no annual limit attached to your HSA. Any unused amount by the end of the year rolls over to the next period.

What Are the Disadvantages of an HSA?

Like any other medical savings account, HSA has its own share of disadvantages, too, including:

  • If you are using an HSA balance to pay for an unqualified medical expense, you will have to pay taxes along with a 20% penalty.
  • Some HSAs charge a per-transaction or monthly maintenance fee varying from institution to institution.
  • You have to keep all your receipts in case of the IRS audit. You might have to prove that you spent money on qualified medical services.
  • HSA might not be the right option for low-income employees. 
  • There are health savings amount limits bringing the annual contribution to $3,600 for an individual and $7,200 for a family.
  • HSA eligibility requirements are really strict. People who have Medicare or are claimed dependents of another person’s tax returns don’t qualify for HSA.

How Does a Health Savings Account (HSA) Help People Save Money?

Thinking “How does a health savings account help people save money?” Well, it doesn’t only let you save money, but it also allows you to make a lot more. Think of HSA as a savings account.

The maximum amount most flexible spending accounts allow you to roll over is $550. However, it’s up to the employer to provide this option. As for HSA, 100% of unused funds are rolled over to the next year. 

You can invest your HSA money in mutual funds, stocks, bonds, and ETFs. HealthSavings Administrators is a good option as they don’t charge an investment transaction fee or require a minimum balance. 

You save money with a health savings account because:

  • Your medical payments are exempt from tax.
  • Your HSA balance grows tax-free.
  • There’s no tax deduction on the money contributed to your account.

How Does a Health Savings Account Affect My Taxes?

Potential clients often ask, “Is HSA tax-deductible?” Yes, it is! This tax-free health savings account helps you save and make more money. There are three tax reasons you should opt for a health savings account:

  • The money you deposit is tax-free. Information you read about HSA pre-tax or post-tax can be confusing. However, it’s simple: the money contributed to your HSA by your employer is not considered income — thus, it can’t be taxed. If your employer doesn’t provide insurance for you, don’t panic. Contribute to your HSA post-tax, claim your contributions as tax deductions, and boom, no tax! The earnings stay in your account until you use them — even if you change employers.
  • With a regular savings account, your earned interest is considered taxable. However, with an HSA, your balance grows tax-free.
  • Using this tax-free medical account, you can withdraw money tax-free as long as you use it for qualified medical expenses. For unqualified medical services, you pay a 20% penalty along with tax.

How to Choose a Health Savings Account?

Now that we are done discussing health savings account pros and cons let’s talk about choosing the right savings account.  

In 2019, health spending per US citizen was $10,966. Medical services are not cheap. That’s when a health savings account comes in. 

Below are a few factors to consider before choosing an HSA account. 

Figure Out What Account You Need

The first step of choosing a health care savings account is to decide what you need it for. If you wish to pay for near-term medical expenses, your primary focus should be on the costs. However, if you plan to save and make the most of it, you need to keep a check on the accounts with no investment threshold.  

Be on the Lookout for Fee

There’s a long list of fees to check out, from account opening and closing fees to monthly maintenance and per-transaction charges.

Compare Interest Rates

Even though the interest rates are pretty low these days, consider comparing a few to make the best choice.

Thoroughly Evaluate Your Investment Options

Along with basic HSAs, some accounts feature an investment option. Many have investment thresholds of $1000 — which means you can start investing after your balance reaches $1000. If your primary purpose is to invest HSA funds, look for the ones with no investment threshold. 

HSA vs. Insurance 

Another common question regarding HSA is, “Does HSA count as health insurance?” According to medical practitioners, HSA acts as a replacement for traditional insurance — and more and more people are leaning toward HSA instead of insurance. 

There’s a difference between HSA and traditional health insurance. With private HSA insurance plans, you pay your medical bills with the money you have contributed yourself. Insurance companies, on the other hand, use the premiums paid by policyholders. 

How to Start a Health Savings Account? How to Qualify for HSA?

These are strict eligibility requirements you must meet to open a health savings account:

  • 18 years of age and above
  • Enrolment into a qualified high-deductible health plan required (HDHP) 
  • No Medicare coverage available (Part A, B, C, D)

Bottom Line 

We hope you now know everything about health savings account pros and cons. If you’re considering opening an HSA, study the eligibility requirements. Individuals enrolled in non-qualified HDHPs are not eligible for HSA. 

If you aim to invest and grow tax-free money, check the accounts with no investment threshold. Remember that if you use an HSA for non-eligible medical expenses, you will have to pay a 20% penalty. However, beneficiaries aged 65 and above are exempt from this penalty and only have to pay tax.

FAQs

Do You Lose Money in Your HSA Account?

HSAs don’t have any limit: you can use the funds whenever you want — even after 20 years.

What Happens if You Don’t Use HSA Money?

Think of an HSA as a long-term investment. You would never lose your funds — even after not using them for decades. 

What Happens to the Money in Your HSA When You Die?

In case your beneficiary is your spouse, they will receive 100% of your HSA funds. However, if it’s someone else, they will inherit the fair market value of your account and will have a year to use the funds for qualified medical expenses. 

When Can You Access Your Accumulated HSA Funds?

You can withdraw your HSA funds at any time for any purpose. But if you use the money to pay for unqualified medical expenses, you will be charged a penalty. 

Can HSA Be Used for Funeral Expenses?

No. Funeral expenses are not considered qualified medical expenses under HSA, FSA, HRA, DCFSA, and LCFSA.