Have you ever heard of a health savings account (HSA)? HSAs are available to many Americans and are often a benefit at work but are often not understood. While your family is unique, an HSA is an option many families with children should consider when making plans for health care expense. Keep reading for some reasons HSAs are beneficial in many cases and could be a blessing for your family.
"Or do you not know that your body is a temple of the Holy Spirit within you, whom you have from God? You are not your own, for you were bought with a price. So glorify God in your body." 1 Corinthians 6:19-20 ESV
What is an HSA?
A Health Savings Account is a kind of account you can have if you also have a type of medical insurance plan designated as a High Deductible Health Plan (HDHP). For employer provided health insurance, your employer should let you know if you are eligible for a HSA. The idea behind an HSA is you put money into the account on a regular basis and then withdraw money later when major medical expenses arise. HSAs are unique types of accounts because they are “triple tax free.”
When you contribute to an HSA, you receive a tax deduction. While money is in an HSA, if it earns interest or grows, you pay no taxes. Later on, as long as you withdraw the money for what the IRS deems a “qualified medical expense”, you pay no taxes then either. Although, keep in mind the HSA is used to cover what insurance doesn't or what is known as “out of pocket expenses”.
#1: HSAs are not “Use it or Lose It” Like Some Other Health Benefits
Most health care benefits are closely tied to the calendar year. Accounts like Flexible Spending Accounts (FSA) or Health Reimbursement Accounts (HRA) put your family in the position of forfeiting unused money (with some limited exceptions) at the end of the calendar year. Any money you have in an HSA at the end of the year just stays and remains available for future medical expenses. If your family is blessed to have a year with lower than expected medical expenses, you get to keep the “excess.”
#2: It’s a Built in Buffer for Unexpected Expenses
Your family should have an emergency fund for unexpected expenses. An HSA, in addition to a general purpose emergency fund, can help with unexpected medical expenses. Children, adults too, have scrapes, broken, bones, and sometimes worse events that require a doctor visit. An HSA can help offset the cost an unplanned medical bill and keep the rest of your budget on track.
#3: You Can Save Up for Big Medical Expenses
Sometimes, you know in advance when a big medical bill is going to happen. Health care events like planned surgery, the birth of a child, and more are an opportunity to set money aside in an HSA to cover a portion or all of a planned doctor bill. Think of it as a way to turn something like the cost of welcoming a new child into a payment plan.
#4: You Can Invest and Grow Your HSA
One of the most powerful features of an HSA is the ability to grow money inside of an HSA. Health Savings account providers give you options that include savings accounts, money markets, mutual funds, ETFs, and more. These options, when used prudently, mean you can grow your HSA dollars over time to cover even more health care expenses down the road with interest, dividends, and investment growth. It’s important to employ similar principles to investing for other goals like watching expenses, being diversified, and keeping a long-term perspective. With those principles guiding you, an HSA can be a way to build up money for years into the future.
#5: An HSA is for your Entire Household
An HSA can be used for your entire immediate family’s health care expenses. This includes your spouse and children. As a family, you also get a higher limit on what you can put into your HSA than a single individual has available.
#6: Your Employer May Give You HSA Money
Employers can contribute money to your HSA. This great benefit, offered by some employers, comes in a variety of ways. Some benefits packages put in a set amount of money into employee health savings accounts every year. Other, choose to put in dollars as a motivator for you to achieve health goals. These incentives are often called “wellness rewards.” Another component here is HR policies tend to award a different amount for participating employees with families. Some other companies have experimented with an HSA match program that puts a dollar in for each dollar you put in up to a limit. In other words, for those organizations that do contribute, families tend to get more of a benefit than single participants do.
Example of how one employer contributes to employees' HSAs
#7: The Tax Benefits of an HSA are Unique and Very Valuable
Health savings accounts are known as triple-tax-free. What does that mean? HSAs have 3 different and important tax benefits. First, when you put money into an HSA, you receive a tax deduction. That comes into play whether your employer deducts HSA contributions from your paycheck or if you put money in on your own. Second, while money is in the HSA there’s no taxes on interest or earnings from investments (capital gains or dividends). Third, as long a money taken from an HSA is for medical expenses, you don’t owe any taxes then either. There are other accounts you can have like an IRA that might have one or two of those tax benefits, but all three is an astounding benefit.
#8: Unlike Most Benefits, You Can Keep an HSA When You Leave a Job
Most on the job benefits, especially health care related, don’t go with you when you leave a job. Any money in an HSA is yours to keep. You can continue to grow the HSA or use it for future medical expenses. This also in contrast to some retirement accounts like 401ks that have vesting and require you to remain in a job for a number of years before the entire account is yours. HSAs have no vesting for dollars you or your employer put in. The entire amount belongs to your family.
#9: You Get to Decide When to Use Your HSA
One of the great things about an HSA is you get to decide when you want to take money out, if at all. Instead of using money from the HSA for a medical expense, you could decide to pay with other money instead of an HSA withdrawal. It also doesn’t have to be an immediate decision. For example, you could get a medical bill and decide to pay the bill with money from your checking account. A few months later, you could then decide to reimburse yourself from the HSA for the original expense. Flexibility can be very valuable.
#10: In the event one spouse dies, the other spouse can continue using the HSA
If a working spouse passes, most work-related benefits will cease. An HSA can have beneficiaries similar to a retirement account. As a beneficiary, the surviving spouse could continue using the HSA to cover medical expenses for themselves and children.
#11: An HSA can be used for a broad range of medical expenses
To get the full benefit, the IRS requires that HSA withdrawals be used for “qualified medical expenses.” This is ultimately a list of qualifying medicine, procedures, and other health care costs the IRS has deemed part of a list. Fortunately, this list is very broad. You’ll want to check for certain, but many treatments, including over the counter remedies, are part of the blessed list.
Bonus Reason: Stealth “Retirement” Savings
Another awesome feature that many families have embraced is using an HSA to save for healthcare costs way down the road. Some households decide to use years where their family is in relatively good health to save for years far in the future (like retirement) when healthcare needs may be higher. This can be a great way to compliment other saving strategies like a 401k or IRA to get the benefit of compounding over many years.
“The aim of medicine is to prevent disease and prolong life; the ideal of medicine is to eliminate the need of a physician.” William J. Mayo
An HSA is not always the optimal choice
While many families with children can benefit from an HSA, other health care options you or your spouse’s employer offers could be better. Healthcare decisions also change from year to year. A plan that includes an HSA could be the best option one year and another option could be best for another year. Overall, it’s a good practice to evaluate your family’s needs whenever benefit enrollment opportunities come up and not just choose the same option every year because it seems easy.
We help Christian families on their journey to financial freedom. If you would like more posts from us on how to balance what's truly important with your finances, please sign up for our free newsletter. If you’d like to hear more about how Intrepid Eagle Finance helps families manage their financial lives, click here to learn more and schedule a free consultation.