HSA Accounts explained via examples. Advantages and Disadvantages

HSA Accounts explained via examples. Advantages and Disadvantages of health savings accounts.

Before we go into the details, I wanted to show you how a health savings account works via an example.

Let’s look at this example>

This is Elisabeth. She lives in San Jose, California and makes $100,000 per year.

Elisabeth is a good citizen and she pays taxes. Her federal tax rate is 24%

As many responsible individuals, Elisabeth has health insurance. She is young and healthy, so she has a high deductible medical insurance plan. This plan has a lower premium, and it works great for Elisabeth since she sees a doctor once or twice per year and wants protection from major medical expenses. She is smart and financially literate, so she decided to have a tax benefit as well by opening an HSA account that will allow her to make are tax-deductible contributions, so she can reduce her federal income taxes owed.

On top of that, the money in her HSA account typically grows tax-free, at least at the federal level. Funds can be withdrawn without being taxed and Elisabeth can use them for qualified medical expenses if she has any or let it grow until she needs it in later years.

Here is an example showing hypothetical HSA tax savings and growth. Assuming that the rate of return will be 2% per year for 10 years and the tax rate will be at 24%, assuming that Elisabeth spends on average $2000 per year.

If all the data remains the same, but we lower the amount Elisabeth spends each year for medical expenses to $500 per year, then the growth will be substantially higher!

Here is a link to this calculator, so you can estimate what are the tax benefits specific to your situation. You can use this tool to calculate the tax-deferred growth and future value of your Health Savings Account. http://hsabank.com/hsabank/employer-resources/tools/HSA-savings-calculator

So, as you can see from the above example, a health saving account could be quite beneficial because it allows you to:

1. Pay for your current health care expenses or save for future medical expenses.

2. The contributions are tax-deductible, or if made through a payroll deduction, they are pretax.

3. The interest earned is tax-free.

4. You may make tax-free withdrawals for qualified medical expenses.

Let’s take a look in detail at HSA accounts.

So, as you already know An HSA is a special kind of tax-advantaged account that’s designed to help you pay for health care expenses.

Anyone can open an HSA, as long as they:

• Have health coverage through a qualified high-deductible health plan. If you don’t have this type of health plan, you CANNOT open an HSA.

• Are NOT covered by any other health plan

• Are NOT enrolled in Medicare, and

• CANNOT be claimed as a dependent on someone else’s tax return.

As previously mentioned, you can withdraw money from your HSA without paying taxes or a penalty as long as those dollars are used to pay for qualified medical expenses. Qualified medical expenses include things that are associated with your health plan, such as:

• Deductibles and coinsurance,

• Vision care,

• Dental expenses,

• Over-the-counter supplies, and

• Some insurance premiums.

The account is owned by you, so no matter where you work, the money that’s in the account, always belongs to you — even if it was contributed by your employer. You can use the money in the account to pay for your current medical expenses or save it for future medical expenses — including those in retirement.

There are many special advantages of opening an HSA.

First of all, the money in an HSA account belongs to you. You’ve probably heard of the Flexible Spending Account…well, unlike the Flexible Spending Account there’s no “use it or lose it” with an HSA. Any dollars left in your account at the end of the year roll over to the next year. That means you decide whether to spend or save your HSA dollars, which makes it easier to save for the future. Another advantage of the HSA is what we call triple tax savings.

Here’s how that works:

• Not only does the money that’s deposited into the account reduces your taxable income,

• But, the balance in your account earns interest tax-free, and

• Any withdrawals from the account are tax-free as long as the money is used for a qualified medical expense. That gives you a triple tax savings. And finally, one of the greatest advantages of the HSA is that it’s portable. Unlike other medical spending accounts that are owned by your employer, the HSA belongs to you, even if you change jobs or retire. Using your HSA is easy. Let’s start by talking about contributions.

Both you and your employer can contribute money to your HSA.

Remember, employer contributions are not taxable to you as an employee, and once the money is deposited into your account, it belongs to you. The best way to contribute to your account is through automatic payroll deductions if your employer allows this. Not only is this convenient, but payroll deductions help you make consistent contributions, and you get the most tax savings this way. Plus, you have the flexibility to change your payroll deduction at any time throughout the year. You have a lot of flexibility when contributing to your HSA. You can put money into your account at any time during the year, and you can even contribute up until the tax filing deadline, which gives you more time to fully fund your account. If you fund your account on a post-tax basis, you’ll realize the tax savings when you file your taxes for the year. This type of contribution becomes an “above-the-line” deduction.

Let’s see how much you can contribute to your HSA.

Every year, the IRS sets a maximum amount that you can contribute to your HSA.

This maximum is based on your health plan contract type — single or family.

• If you have single coverage, you can contribute a maximum of $3,550 in 2020.

• If you have family coverage, you can contribute a maximum of $7,100 in 2020.

These maximums include contributions made by you and your employer. Together, your contributions cannot exceed these amounts. Every year the amounts change. Of course, there are exceptions to every rule, and with HSA contributions the exception is those account holders who are 55 or older at any time during that year. These individuals can contribute an additional $1,000 every year to an HSA. This is called a catch-up contribution.

2021 Health savings account (HSA) contribution limits

The annual limit on HSA contributions will be
$3,600 for self-only

$7,200 for family coverage

Here are just a few more things to keep in mind when using your HSA.

• Withdrawals from your account are tax-free as long as the money is used for a qualified expense. (I will have a list of all qualified medical expenses in the description of this video).

• Expenses must be incurred on, or after, the date that your HSA

Here is one more thing that is very important to keep in mind. If you take the money out of Your HSA account and use it to pay for things that are not considered qualified expenses, then you will be paying a 20% penalty + taxes if you are under the age of 65 or you will pay taxes on these purchases and no penalty if you are over the age of 65. So, it is very important to study the list of IRS qualified medical expenses to avoid these extra penalties and taxes.

Here are some disadvantages of health savings accounts:

1. First of all, in order to qualify for health savings account you will need to purchase a high deductible insurance plan. These plans have a high deductible and out-of-pocket expenses for copays and coinsurance are much higher than a typical insurance plan. If you rarely see a doctor and don’t use your insurance plan often anyways, this won’t be a problem. However, if you use extensively your insurance a high deductible insurance plan might not be as advantageous and therefore you will spend the HSA funds really fast without many benefits. So, I would advise, before deciding to invest in an HSA account, analyze your individual needs and situation. Do the math or reach out to us and we can help you run a side-by-side comparison.

2. Another disadvantage of the HSA account is that you will pay penalties and taxes if you do not follow the rules. Remember, if you use the money to pay for non-qualified expenses you will owe taxes and a 20% penalty if you are under the age of 65. If you are over 65 you will pay taxes on the amount spend on non-qualified expenses.

3. And finally, some banks have a monthly maintenance fee or a per-transaction fee, which varies by institution. These fees are not much, but it could add up. So, do your homework and compare the fees and features of the plans if you are considering an HSA account.

If you would like to apply for an HSA application — you can use this online tool — here is the link: https://secure.hsabank.com/enrollment/?ain=1061474&id=

What are the fees?

Here are the fees charged by the HSA Bank. For details regarding the general terms and conditions that apply to your HSA, see the Deposit Account Agreement and Disclosures for Health Savings Accounts.

Service Fees — HSA Service Fee $2.50

How to Avoid Fee? Maintain an average HSA Bank cash account daily balance at or above $3,000.

2 Printed HSA Account Summary Fee $1.50

How to Avoid Fee? Elect to receive free e-statements through the Member Website.

HSA Closure Fee $25.00 If you lose your high-deductible health plan (HDHP) coverage, you can continue to use your HSA funds for eligible expenses.

Important Update: CARES Act expands the use of health accounts

The new CARES Act expands eligible expenses for HSAs, FSAs, and HRAs:

• Feminine hygiene products are now qualifying medical expenses.
• You can now use your HSA, FSA, or HRA for over-the-counter (OTC) medications without a prescription. See the Common Over-the-Counter (OTC) Medications section below for examples.
• Many products being discussed in the news, such as lodging, disposable masks, and hand sanitizer, are considered qualifying medical expenses only with a prescription (Rx) or letter of medical necessity (LMN) from a doctor.
• These changes will likely take effect gradually. Not all retailers will update at the same time, which may result in inconsistent shopping experiences. Such issues are likely to be resolved soon. For information on reimbursing yourself for out-of-pocket medical expenses from your HSA, click here.
• You can now use your HSA for telehealth services before reaching your deductible without impacting your eligibility for an HSA. You can use your HSA for telehealth for qualified expenses. Both instances are effective until Dec. 31, 2021.

Common IRS-Qualified Medical Expenses

• Acupuncture
• Ambulance
• Artificial limbs
• Artificial teeth*
• Birth control treatment
• Blood sugar test kits for diabetics
• Breast pumps and lactation supplies
• Chiropractor
• Contact lenses and solutions*
• Crutches
• Dental treatments (including X-rays, cleanings, fillings, sealants, braces and tooth removals*)
• Doctor’s office visits and co-pays
• Drug addiction treatment
• Drug prescriptions
• Eyeglasses (Rx and reading)*
• Fluoride treatments*
• Feminine hygiene products
• Fertility enhancement (including in-vitro fertilization)
• Flu shots
• Guide dogs
• Hearing aids and batteries
• Infertility treatment
• Inpatient alcoholism treatment
• Insulin
• Laboratory fees
• Laser eye surgery*
• Medical alert bracelet
• Medical records charges
• Midwife
• Occlusal guards to prevent teeth grinding
• Orthodontics*
• Orthotic Inserts (custom or off the shelf)
• Over-the-counter medicines and drugs (see more information below)
• Physical therapy
• Special education services for learning disabilities (recommended by a doctor)
• Speech therapy
• Stop-smoking programs (including nicotine gum or patches, if prescribed)
• Surgery, excluding cosmetic surgery
• Vaccines
• Vasectomy
• Vision exam*
• Walker, cane
• Wheelchair

Common Over-the-Counter (OTC) Medicines

Examples include, but are not limited to:

• Acid controllers
• Acne medicine
• Aids for indigestion
• Allergy and sinus medicine
• Anti-diarrheal medicine
• Baby rash ointment
• Cold and flu medicine
• Eye drops*
• Feminine antifungal or anti-itch products
• Hemorrhoid treatment
• Laxatives or stool softeners
• Lice treatments
• Motion sickness medicines
• Nasal sprays or drops
• Ointments for cuts, burns or rashes
• Pain relievers, such as aspirin or ibuprofen
• Sleep aids
• Stomach remedies

Services That May Be Eligible with a Letter of Medical Necessity Completed

This list is not all-inclusive:

• Weight-loss program only if it is a treatment for a specific disease diagnosed by a physician (e.g., obesity, hypertension, heart disease)
• Compression hosiery/socks, antiembolism socks or hose
• Massage treatment for specific ailment or diagnosis
• CPR classes for adult or child
• Improvements or special equipment added to a home or other capital expenditures for a physically handicapped person

Ineligible Expenses

Listed below are some services and expenses that are not eligible for reimbursement. This list is not all-inclusive:

• Aromatherapy
• Baby bottles and cups
• Baby oil
• Baby wipes
• Breast enhancement
• Cosmetics and skin care
• Cotton swabs
• Dental floss
• Deodorants
• Hair re-growth supplies and/or services
• Health club membership dues
• Humidifier
• Lotion
• Low-calorie foods
• Mouthwash
• Petroleum jelly
• Shampoo and conditioner
• Spa salts