Chinese people often say plan ahead, but not many people are willing to set up HSA. Maybe it’s because of my ignorance that few of my friends have HSA accounts. HSA stands for Health Saving Account. As the name suggests, it is a savings account for medical and health care. It is limited to those who have purchased high self-pay insurance. After using it, you can save money and save taxes!
Conditions for applying for HSA
To open an HSA, the following conditions must be met:
- Your health insurance must be of the High Deductible Health Insurance Plan “high out-of-pocket” type. Short-term medical insurance does count!
- You may not have other non-HDHP medical insurance. The dental insurance and eye insurance do not count.
- You do not have Medicare/Medicaid.
- You are not dependent on anyone else when you file your taxes. For example, if I am a dependent of my husband, he can open an HSA, but I cannot.
- under the age of 65.
What is “high out-of-pocket health insurance”?
The key is to look at two numbers: Annual deductible and Annual out-of-pocket maximum; taking the fiscal year 2021 as an example, the IRS defines HDHP insurance as follows.
HSA Account Opening and Deposit Deadlines
The HSA account opening and deposit deadline are April 15 of the following year, the same as tax filing. Money deposited before April 15, 2021 counts as 2020.
If you have high out-of-pocket health insurance for only a few months of the year, the maximum savings will be affected; according to the IRS :
- Last-month rule: If an individual starts on the 1st of the last month of the tax year (i.e. December 1st), he holds high-deductible medical insurance and continues to hold high-deductible medical insurance throughout the following year. insurance and he also meets the other conditions for opening an HSA (see above), then he can save the maximum amount for the current tax year.
- Sum of the monthly contribution limits rules: For those who do not meet the above conditions, the maximum deposit amount will be adjusted proportionally according to the month in which the high self-payment medical insurance is held in the tax year; for example, if you have high self-payment insurance for 6 months of the year, then Deposit half of the upper limit.
Benefits of an HSA
The maximum deposit in 2021 is $3,600 for individuals and $7,200 for families. Contribution can come from employers (sweeping company wool) or employees themselves. What’s even better is that anyone can put money into your HSA, but of course, these people don’t get tax-free benefits. The amount that the employer + individual + others contribute to you cannot exceed the maximum deposit amount in total.
HSAs have three tax advantages:
- Contribution is tax-exempt. Contribution is credited with the pre-tax amount, ie, your salary minus the amount deposited in the HSA, and the rest is tax-deductible. Contribution can be debited directly from your paycheck, or transferred from your own bank. If you transfer money by yourself, you can apply for a tax refund when you file a tax return in the following year because you use after-tax money.
- Money taken out of an HSA for medical expenses is tax-free. Medical expenses range from doctor visits to copay & coinsurance, prescription medicines, OTC medicines (still need a doctor’s prescription), acupuncture treatments, dentist visits, eye exams, glasses, hearing aids, and more. If you withdraw money to pay for non-medical-related expenses, you will need to pay back the tax + pay a 10% penalty. But when you retire at 65, the money in the HSA can be used as you like.
- The money in the HSA has interest and can also be used for investment, and the interest and investment income are tax-free.
PS: The tax exemption mentioned above refers to the exemption from federal tax, and state tax varies from state to state.
When your HSA has accumulated to a certain amount, generally $1,000, it can be used for investment, and some institutions do not stipulate the minimum deposit amount that can be used for investment. The bank or financial institution where you open your HSA offers a variety of investment options. But be aware that investing is risky, you may make money or you may lose money.
The money in the HSA can be accumulated, and if it is not used up this year, it can be accumulated to the next year. How much to save, how much to use, and how much to invest is all up to you! Even if you change jobs, the new employer can keep putting money into it (provided the new employer also offers this benefit). When you no longer use high-deductible medical insurance in a certain year, you are no longer eligible for HSA, and your HSA account will not be closed. You can continue to use the money in it for medical expenses, but you cannot save money in it. . The next year you switch back to high deductible health insurance and you can keep saving.
Even if only you personally have an HSA, you can pay for medical bills for your family. Family members include spouses and children under the age of 26.
Disadvantages of HSAs
There are two sides to everything, and HSAs also have some disadvantages.
- Less cash is available on hand. If there is an emergency that requires cash, it may be stretched.
- Need to have high out-of-pocket health insurance all the time. High deductible health insurance offers low monthly premiums but high deductibles. This type of insurance uses low premiums to urge you to use preventive alternative treatment, reduce the burden on the medical system, and is suitable for young people who are usually healthy. If you’re anticipating large medical expenses this year, such as having a baby, you might opt for lower out-of-pocket coverage, which will have higher premiums and isn’t eligible for an HSA.
- Investment decisions may affect the timing of medical treatment. The amount of the HSA used for investment cannot be withdrawn for medical expenses temporarily. If you suddenly need a large sum of money to pay for deductible (remember that your insurance report is high self-pay), then you may have to find a way to raise this money. seek medical attention.
How to open an HSA?
Many banks, credit unions, investment firms, and even insurance companies can open HSAs. First, ask HR, if your employer offers this benefit, HR will take care of all the paperwork for you. The employer does not provide this benefit, or you don’t like the list of institutions given by the employer, it doesn’t matter, we can open it ourselves. These companies that provide HSAs are called Admins or Custodians.
Before opening an HSA, you should think clearly about the purpose. Is it mainly for medical expenses, or is it mainly for saving + investing?
- If you mainly use medical expenses, you should choose an HSA company with low management fees or no management fees and high interest.
- If you are mainly investing, you should pay attention to whether HSA companies offer a variety of investment options, fees per transaction, and the investment performance over the years. Although previous performance cannot represent future development, it is always a reference.
- What if you want to spend money, save money, and invest? Can you fulfill three wishes at once? Multiple HSA accounts can be opened at different institutions, but the total annual contribution of all accounts cannot exceed the limit set by the IRS (mentioned above).
How to use the money in your HSA
The bank or financial institution that opened your HSA will send you a debit card, which is your dedicated HSA card. For any medical expenses, just swipe your card directly. Or you can swipe your credit card to get a credit card rebate, then keep the receipt and reimburse the HSA management company. Whether it is swiping the card or reimbursement afterward, you must keep all medical receipts for the IRS audit. Of course, we small coffees have little chance of being audited.