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Health Savings Accounts Explained

Answers to 9 questions many people have—from who's eligible to what costs these accounts can help you cover

WHAT IF YOU COULD GET health insurance coverage and tax benefits, while being able to save for your future, all at the same time? A Health Savings Account (HSA) linked to a high-deductible health plan (HDHP) can do all that. Which may be why, increasingly, companies are offering these accounts as an option for their employees as they plan their health coverage. And people who are self-employed are increasingly considering them as well. "HSAs are intended to help you save pre-tax or tax-deductible dollars to pay for qualified medical expenses—both now and in the future—that aren't covered by insurance," says Tom Matarazzo, head of Health Benefits & Institutional Retirement Investments at Bank of America Merrill Lynch.

Still, many people find HSAs confusing. Here's some information about them to mull over as you consider ways of funding present and future health-care costs.

"An HSA is triple tax-advantaged—when money goes into the account, when it grows and when it comes out."— Tom Matarazzo, head of Health Benefits & Institutional Retirement Investments, Bank of America Merrill Lynch

1. Who’s eligible for a Health Savings Account?

The primary condition for opening an HSA is that you must also be enrolled in a qualified high-deductible health plan (HDHP). For 2019, HDHPs require an annual deductible of $1,350 or more for an individual ($2,700 for a family). In addition, for 2019, they need to provide an out-of-pocket maximum of $6,750 per year ($13,500 for a family) before covering 100% of allowable medical expenses. Even if your employer doesn't offer an HSA—or if you're self-employed—you may be able to open an HSA on your own, as long as you’re also enrolled in an HDHP. Keep in mind, in addition to being enrolled in a qualified HDHP, you cannot be claimed as someone else’s dependent and you cannot have disqualifying additional medical coverage, such as a general purpose health flexible spending account (FSA).

2. What are the tax advantages of opening an HSA?

The money you can contribute to these accounts is tax-deductible or pre-tax, and any increase in the value of your account is free from federal taxes—as are withdrawals for qualified medical expenses. "One of the most important features of an HSA is that it's triple tax-advantaged—when money goes into the account, when it grows and when it comes out," Matarazzo says. 1

3. How much can I contribute to an HSA yearly?

When making HSA contributions, keep in mind these limits for 2019 and 2020. You can put money into an HSA every year you are eligible, until you enroll in Medicare. After that, you're no longer allowed to contribute. Special rules apply to reduce the annual limits in a year you become or cease to be eligible.

4. What expenses can I cover with the funds in my HSA?

A wide range of routine medical costs, including:

  • Qualified out-of-pocket medical expenses you incur before you've met your HDHP deductible
  • Medical, dental or vision coinsurance and co-payments
  • Prescription drugs
  • Some medical treatments not covered by your insurance, such as visits to a chiropractor
  • Some kinds of medical equipment, like eyeglasses

5. How can I tap into my HSA funds?

There are a number of ways you can tap into the cash in your HSA. While the availability of certain features will differ depending on the provider, some HSAs will give you a debit card or checkbook that you can use to directly pay for qualified medical expenses. With other providers, you might be able to set up a direct transfer of funds from your HSA to your regular bank account to reimburse yourself for qualified expenses you've already incurred. You can check with your employer or the HSA administrator to learn about the available options.

6. Are there any time restrictions on my ability to use an HSA?

No, one of the great advantages of an HSA is that you're not required to take money out of it by any given date, such as the end of the year—you can save and may even be able to invest your balance until you need it. If you lose your job and continue insurance coverage under COBRA, you can use your HSA to pay your premiums. Another plus: Even if you leave the employer that originally sponsored your HSA, you can roll the balance over to another HSA—either one offered by your new employer or an HSA you open yourself.

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To learn how to make the most of the health-care options your employer might provide, check out "Health Perks at Work."

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7. What are my investment choices?

It varies. Some HSAs function as savings accounts only; others allow you to invest your contributions in a choice of mutual funds or other investment options, giving your account the potential to grow. If you're thinking about making that sort of investment, consider your goals. Do you plan to use the account to pay for everyday health expenses in the short term rather than saving it for future anticipated medical costs? If so, then you may want to keep those funds in cash or investments that offer easy access to cash.

Anticipating that you won't be using the account anytime soon? Then consider mutual funds or other investment options better suited for the long term. Be aware that your account balance might have to reach a certain amount before your provider allows you to invest it, and you may need to maintain a certain cash balance in your account.

8. Can I use my HSA in retirement?

Yes, starting an account now, while you're in good health, could help you in retirement—when your medical bills are likely to increase. Once you're 65 or older, your HSA can be used to pay for Medicare premiums for Parts A, B or D with tax-free withdrawals, as with other qualified medical expenses. You can even pay for non-qualified expenses, but you will need to pay regular income taxes on those withdrawals. In addition, notes Roger W. Gray, Director, Health Benefit Solutions at Bank of America, "You can also use an HSA to pay with pre-tax dollars for your qualified long-term care insurance premiums."

9. Are there instances in which an HSA is not necessarily the best choice?

An HSA may not be right for everybody. You might prefer to select a health insurance plan with a lower deductible, in which case you wouldn't be eligible to contribute to an HSA. Or you might, for instance, have other savings priorities—like building a general emergency fund—that leave little room in your budget for funding yet another savings account. Or if you're young and in good health, you might decide you'd rather devote any spare cash to investing in an IRA or other account dedicated solely to retirement.

But for many others, an HSA can be a useful solution for addressing some of the high costs of health care. "In today's health-care market, we all need to take a long-term view of health coverage," says Gray. "If you consider the cost of insurance in combination with the potential savings provided by an HSA, you may be better positioned to meet your medical needs—and possibly have money left over to help you meet your other goals."

3 Questions to Ask Your Advisor

  1. My employer doesn’t offer Health Savings Accounts. Is there another way I can open one?
  2. How could an HSA help supplement my long-term care insurance?
  3. Given my age, could it make sense for me to put the money I would contribute into an HSA into another kind of investment account?

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1 Any interest or earnings on the assets in the HSA are tax-free while held in the account. You can receive tax-free distributions from your HSA, including distributions of interest or earnings, to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and, if withdrawn before age 65, death, or disability, may be subject to an additional 20% federal tax. You may be able to claim a tax deduction for contributions you, or someone other than your employer, make to your HSA. We recommend you contact qualified tax or legal counsel before establishing a HSA.

Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

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