Like most industries, financial planning has it’s fair share of jargon and acronyms. These are commonplace for those of us working in the industry but can be like a foreign language to clients. I thought I would use a Friday letter every couple of months to explain some of the more common abbreviations in our world. 

This month is the abbreviation HSA, which stands for Health Savings Account. If you’re going through open enrollment for benefits right now, an HSA may be an option available to you. But what exactly is an HSA, and what might it mean for you? While they are associated with a specific type of health insurance, HSAs are not insurance. Rather, they are tax-advantaged savings accounts for medical expenses.

Who can contribute to an HSA?

• Must be covered under a qualified High Deductible Health Plan (HDHP)
• Cannot be covered under another type of health plan, including Medicare Part A, Medicare Part B or TriCare
• Cannot be claimed as a dependent on another person’s tax return

What are the key benefits of an HSA?

• Contributions are made with pre-tax dollars (in 2024 up to $4,150 for self-only coverage and $8,300 for family coverage – additional $1,000 over age 55)
• Earnings are tax free and withdrawals are tax free when use for qualified medical expenses
• No “use it or lose it” penalty – funds can roll over year to year
• Funds can be withdrawn for any reason after age 65 without a penalty (still taxable if not used for qualified medical expenses)

What is a high deductible health plan (HDHP)?

HDHPs have higher deductibles than traditional insurance plans and lower monthly premiums. Even with the higher out of pocket costs, there can be overall savings due to the lower premiums and HSA benefits. These plans provide the opportunity to direct money to a savings account instead of directing that money to insurance premiums.

What happens to an HSA if I change insurance?

If you change employers or insurance plans, you may no longer be eligible to contribute to an already established HSA. However, the funds in the account can still be used for qualified medical expenses for yourself, your spouse or dependents. If you get a new HSA through a different employer, the old account can be transferred to the new HSA.

Is an HSA right for me?

It depends on a lot of factors whether a HDHP/HSA is a good fit for someone. In general, if you are healthy and have low medical expenses (primarily preventative care visits) this type of plan can be a great fit. Out of pocket costs can add up with expensive prescriptions and specialist visits. Another key consideration is the difference in premiums between the plans and any employer contributions that are put into the HSA. Personally, my family is covered under an HDHP/HSA through my husband’s employer. Even though we do have some specialist visits and expensive prescriptions, the overall savings in premiums plus employer contributions outweigh the out of pocket costs even in a worst-case scenario.

If you’re in a high tax bracket and have maxed out other tax-deferred savings, an HSA can be a great way to save on taxes. If you have plenty of cash flow or other assets to cover out of pocket expenses, you can let the funds in the HSA grow increasing the tax benefits.

We’d love to hear from you – let us know if there is any jargon or abbreviations you would like covered in a future email. As always, we are here for you. Please email or call if you want to set up a Zoom video conference meeting or talk by phone.

Mary McCraw, CFP®

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