Who Do HSAs Make Sense For?

A health savings account (HSA) can be a tool to shield money from taxes while using those funds for specific medical expenses. Your employer may offer a health savings account as a way to keep medical expenses down for those in a high deductible health care plan. Employers generally subsidize a majority of the cost so the premium you pay via payroll deduction isn’t even close to the full amount. While HSAs are attractive in terms of costs and in terms of taxes, they may not be for everyone.

Do you need help with your HSA or other investment accounts? Speak with a financial advisor who serves your area today.

What Is an HSA?

HSAs have risen in popularity over the past few years because, in combination with high-deductible health plans (HDHPs), they can vastly reduce the monthly premium you and your employer pay. A higher deductible means lower premiums, and that could mean huge savings for you and your employer. (Salaries and healthcare are generally the two biggest expenses for a business.)

The basic premise behind the HDHP/HSA combo is pretty simple: You cover the (relatively) small things like when you get sick and need antibiotics, and insurance will cover the big things like broken bones after you meet your deductible.

This way you are insuring against things that are unlikely to happen while paying out of pocket for minor medical issues without involving a third party like an insurance company.

Why HSAs Are Becoming More Popular

Employers like offering HSAs because they can save everyone a lot of money. Most employers even offer an HSA contribution on your behalf in addition to reduced premiums to incentivize employees to switch.

If you’ve been faced with the decision of opting for an HSA/HDHP combo, you may have some questions. HSAs are riskier than traditional plans, but they are also a lot less costly.

So how do you know if the HSA option is right for you? To some extent, it depends on how prone you are to get sick or need medical attention.

Who Do HSAs Make Sense For?

If you never – or rarely – need to see the doctor, then you can take your employer’s contribution and the monthly premium savings and add them straight to your HSA account every year. After a few years, you could potentially have a large nest egg built up that is tax-free when used for medical expenses.

The other attractive feature of HSAs is the money stays with you (not your employer) and you can use it at any point in your life. So even if you’re the model of perfect health right now, you can invest that money for 30-40 years and use it when you’re retired. Money in your HSA can even be applied to deductibles, coinsurance and copays if you decide to switch back to a traditional plan in the future.

HSAs might not make sense if you have some type of chronic medical condition. In that case, you’re probably better served by traditional health plans. HSAs might also not be a good idea if you know you will be needing expensive medical care in the near future.

When you have a copay, you know how much it will cost to visit the doctor, but it can be difficult to find out the cost of medical care when you are paying yourself. Also, the desire to keep money in an HSA may prevent some people from seeking medical treatment or emergency department care when they really need it. Plus, if you take money out of your HSA for non-medical expenses, you will have to pay taxes on it.

How HSAs Can Help You Save

HSAs have more risk, but there can be a large potential upside.

A lot of people are scared to switch to HSAs because of the fear of getting sick and having to pay that big deductible. But it’s important to consider the premium savings and employer contribution (if applicable).

Your monthly savings are generally pretty significant when you switch from a traditional PPO/HMO plan to an HSA/HDHP combo, so you can add those savings to your HSA every year. In addition, you can contribute money to your HSA, so that if there is a gap, you can pay for it with tax-free dollars.

Ultimately though, HSAs have more risk, but there can be more potential upside. HSAs are the only retirement accounts that are triple tax-free: The money you put in is tax-free, the money you take out is tax-free and the investment gains are tax-free.

You can calculate your yearly savings by opting for the HSA (just add up the employer contribution and premium savings) and compare that to the HDHP deductible. That way you know what your breakeven point is, or how long you have to go without any major medical care before the HSA/HDHP combo saves you money.

What You Can Use HSA Funds For

HSA funds can be used to pay for qualified medical expenses for the account holder, their spouse and any dependents. The following are some examples of qualified medical expenses:

Doctor visits: payments for primary care, specialists and consultations.
Prescription medications: costs for prescribed drugs are fully covered with HSA funds.
Medical procedures: including surgeries, hospital stays and diagnostic tests.
Dental care: expenses like cleanings, fillings, braces and dentures.
Vision care: covering costs for eye exams, glasses, contact lenses and corrective surgeries like LASIK.
Therapies: physical therapy, chiropractic care and mental health services.
Medical equipment: items like wheelchairs, crutches and hearing aids.
Long-term care expenses: including nursing home care and home health aides.
Over-the-counter medications: including pain relievers, allergy medications and other non-prescription drugs.
Health insurance premiums: under specific conditions, such as COBRA coverage or while receiving unemployment benefits.

HSA vs. HMO

An HMO, or health maintenance organization, is a network of medical care providers that you get access to at a discounted rate if you’re part of the network’s insurance plan. When you select an HMO you’ll likely get a better price than an HSA but you will also be much more restricted in what doctor you can see because expenses for out-of-network physicians or hospitals won’t typically be covered.

An HMO will often have a very low deductible or none at all. Some expenses might be covered under an HMO if your doctor refers you to an out-of-network facility. Check out our resource on HSA vs. HMO to learn more.

Bottom Line

Before making the switch, be sure to look at how much you spent on healthcare over the last few years to see if an HSA makes sense for you. It may be that a traditional healthcare policy is the better choice. Or it may be that a health reimbursement account (HRA) makes more sense, especially since you can pair it with an HSA or an HDHP. Only a careful assessment of your recent medical expenses and your current health condition can give you the insight you need to make a good choice.

Tips on Healthcare

Consider working with a financial advisor as you update your healthcare plans. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Another important thing to think about is life insurance. Use SmartAsset’s life insurance calculator to see how much you need so you can make any adjustments you need to.