Employee benefit plans like paid vacation time or health insurance coverage may be taken for granted in certain professional roles. Other optional benefits, such as the health savings account, might go unused altogether. The ability to contribute to an HSA might seem insignificant at first, but it can in fact provide considerable savings for one spending category that tends to increase over time: health care.
"HSAs are helpful for people with high health care costs."
HSAs are a type of tax-advantaged account to which eligible employees may contribute up to $3,400 per year. After earning interest like an investment, HSA contributions can then be withdrawn tax-free and used for approved medical expenses.
A study from the Employee Benefit Research Institute reported that as of the end of 2015, there were about 4 million active HSAs in the U.S. with combined assets of $7.4 billion. These accounts are estimated to help cover medical expenses for as many as 22 million Americans.
An HSA can prove especially helpful for those who expect to have generally high health care costs in a given year, including those in retirement or near retirement age. But another report from Morningstar found that HSAs "are a very under-researched corner of the market," and that participants "have few resources available to help them navigate the hundreds of [HSA] plan providers that exist."
How can eligible employees find an HSA that meets their needs? Here are a few key ways experts say can help employees find a high-quality plan:
Who qualifies for HSAs
Workers may open their own HSA regardless of whether their employer offers such a plan. However, only those who are enrolled in a health insurance plan with a high deductible are allowed to use an HSA. As of 2017, a single person's deductible must be at least $1,300, or $2,600 for a family, to qualify.
Those familiar with standard retirement account plans like the 401(k) or IRA will probably be familiar with the workings of the HSA, too. Like these funds, HSA holdings may be invested into mutual funds for long-term growth, but they can also work more like a checking account and be used primarily for spending.
There are accounts designed for one or the other, according to The New York Times, but rarely both. HSA plans with a good selection of investment options also tend to charge monthly maintenance fees, sapping some of those earnings. The best accounts for spending, meanwhile, may not charge those fees, but will not provide much growth opportunity either.
With this in mind, prior to enrolling in a new HSA, it's important to consider what you will be using it for. If you are younger and generally healthy, it might be wise to contribute to a plan that offers a good mix of low-cost investment funds and let those savings grow over time. Those who are generally older might opt for a spending-focused account that doesn't charge a maintenance fee. If you aren't happy with the HSA offered by your employer, it is possible to periodically transfer savings from one account to another of your choosing.
Flexible spending accounts
HSAs are often confused for flexible spending accounts, another employee benefit used to help pay for health care. But FSAs and HSAs are not the same thing - most importantly, there is no restriction to high-deductible insurance plan members for the FSA. Contribution limits for FSAs are also usually lower. Contributions to and withdrawals from an FSA are also tax-free, but usually need to be used within the same calendar year or else be relinquished to the employer.
Speak with your plan manager or another financial professional for more tips on using an HSA.
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