Guide to the Health Savings Account

By Jon Scott

In this article we will cover:

  • When can you contribute to an HSA

  • How is an HSA useful for medical care (employer may contribute on your behalf, triple-tax benefits, money never expires like in an FSA)

  • How is an HSA useful in retirement planning?

  • Where to open an HSA (watch out for fees) and how

  • How to roll an HSA over to another brokerage if your provider charges too high of fees

Did you know there is a way to pay for nearly all of your medical needs, tax-free? If not, let's dive into Health Savings Accounts. Also known as HSAs, Health Savings Accounts are used in concert with a High-Deductible Health Plan (HDHP). These plans allow you to put aside money from your paycheck into your HSA, that enjoy triple-tax benefits (within limits) as long as the funds are used for qualified medical expenses.

How to Contribute to an HSA

  1. You must have a High-Deductible Health Plan ($1,400 for an individual and $2,800 for a family) to open an HSA. Most likely this plan will be provided by your employer.

    1. Plans through an employer may allow account fees to be waived from your HSA account

    2. Some employers contribute to HSA plans for their employees as well

  2. Contributions are deducted from your paycheck into your HSA

    1. You may contribute to your HSA up until the tax deadline

    2. For example, if tax day is April 18th, 2022 for tax year 2021, I can contribute up until my contribution limit until that date. Any contributions after that date fall in tax year 2022.

Tax Free Contribution Limits

Benefits of an HSA

Triple-tax benefit

  1. Money contributed to an HSA is tax-free up to $3,650 for individuals and $7,300 for families (2022)

  2. Funds from your HSA invested into financial assets grow tax-free, and roll over year to year

  3. Distributions (withdrawals) from the HSA are tax-free as long as the funds are spent on qualified medical expenses

Examples of Qualified Medical Expenses (there are many more)

HSA vs. FSA (Flexible Spending Account)

How to Use HSA Funds

Generally, your HSA provider will issue a card for you to use on qualified medical expenses.

How to File Your Taxes if you have an HSA

You will file an IRS Form 1099-SA where you list your total HSA distributions. You may also need to file Form 5498-SA, which reports annual contributions to your HSA that you used to pay for medical expenses.

HSA Cash Balance vs. Investment Balance

HSA cash balance is the amount of uninvested cash in the account. The investment balance are funds invested in securities like stocks, bonds, etc.

How is an HSA useful in retirement planning?

  1. Tax-free distributions to pay for medical expenses. Unlike 401K plans which tax the account holder for their distribution amount each year, HSA distributions are tax-free if spent on qualified medical expenses. A well-funded HSA in retirement means large savings if tax-free HSA distributions are used instead of 401K or even IRA funds, which are pre-taxed.

  2. Investing your HSA can lead to significant returns. A family investing the max amount in their HSA each year over a 30-year period with a 7% return will have $1,000,000 in HSA dollars. The total cash amount invested would be $322,000 with investment growth accounting for the remaining amount.

  3. Once in retirement, you can utilize your HSA account to pay for:

    1. Expenses not covered by Medicare

    2. To cover Medicare premiums

    3. To pay for long-term care,

    4. To pay for other non-medical expenses (however you will be required to pay state and federal taxes on these distributions)

How to Open an HSA

HSA are relatively easy to create:

First and foremost, you must select a High Deductible Health Plan (HSA) to be eligible for an HSA. If you select a HDHP through your employer or opt for private insurance not through an employer, there may be a specific HSA provider that you will have to create an account with. You will want to follow the steps provided by your employer.If you are not required to choose a specific HSA provider through your HDHP, you will need to create an HSA account through a provider. Many institutions provide HSA services, here are a select few.

  • It is important to choose a HSA that charges minimal fees. When searching for HSA accounts, you will want to find plans with the lowest or no fees for the following

    • HSA Service Fee

      • The amount charged per month to maintain your HSA. This may be covered by your employer.

    • HSA Check Distribution Fee

      • When you use a check to make qualified medical expenses, you can avoid this by using online transfers and Internet fees.

    • HSA Closure Fee

      • If you lose your HDHP coverage, this is a fee for closing the account.

    • Debit Card Issuance Fee

      • Charged for debit cards sent to the HSA account holder and dependents.

    • HSA Returned Item Fee

      • Charged if you don’t have enough money in your account to cover the item you are trying to purchase.

    • Minimum Account Balance

      • Be aware if your HSA provider requires a minimum amount in your account

    • Account Transfer Fee

      • Charged if you transfer your HSA to another account or provider.

      • Some HSAs also offer an interest rate that can help grow the money available.

  • Once you complete your HSA setup, you want to allocate a certain amount of each paycheck to the HSA. This makes sure the money flows into the account tax-free.

    • Many payroll systems have a section to allocate to your HSA account and even a tool to calculate how much of each paycheck will be deducted to go to your HSA.

  • Most likely, you will receive a debit card to use when making qualified medical expense payments. Be sure to keep receipts and records of the expenses charged to the card.

How to roll over an HSA to another provider if your current provider charges too much for fees

Many HSA providers charge an account transfer fee. You will want to be aware of the amount when transferring. A direct transfer from HSA to HSA is not considered a rollover if the trustee on both accounts are the same. To initiate a transfer from one HSA to another, set up a new HSA with a new institution. Make sure you are the trustee on the old and new account. Usually the old HSA provider will have a process for transferring your HSA, follow those steps.

It also may be advantageous to keep the HSA funds in the old account instead of transferring them to the new one. In this case, you would simply leave the funds in the account as normal. However, make sure to check in periodically on your old account to ensure it remains open even after you stop contributing.