How a Health Savings Account can help you manage medical costs

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If you're looking to get a handle on health care, these accounts can help. Here's how to get the most out of them.

Key points

  • While most people are offered Health Savings Accounts (HSAs) through their employer, they are generally available to anyone who combines them with a high-deductible health plan
  • HSAs can help you pay for current or future qualified medical expenses with tax-free or tax-deductible dollars
  • Any unused balance in your HSA rolls over year to year, and you can keep your HSA even if you change jobs
What if you could get health insurance coverage and tax benefits, while being able to save for your future, all at the same time? A Health Savings Account (HSA) linked to a high-deductible health plan (HDHP) can do all that. Which may be why, increasingly, companies are offering these accounts as an option for their employees as they plan their health coverage. And people who are self-employed increasingly consider them as well.
"HSAs are intended to help you save pre-tax or tax-deductible dollars to pay for qualified medical expenses — both now and in the future — that aren't covered by insurance," says Tom Matarazzo, head of Health Benefits & Institutional Retirement Investments at Bank of America Merrill Lynch.
But, for many, HSAs and how they work can still seem confusing. Here's some information that you can use as you consider whether such an arrangement might make sense for you.

Am I eligible for a Health Savings Account?

The primary condition for opening an HSA is that you must also be enrolled in a qualified high-deductible health plan (HDHP). For 2018, HDHPs require an annual deductible of $1,350 or more for an individual ($2,700 for a family). In addition, they need to carry an out-of-pocket maximum of $6,650 per year ($13,300 for a family) before covering 100% of allowable medical expenses. Even if your employer doesn't offer an HSA — or if you're self-employed — you may be able to open an HSA on your own, as long as you're also enrolled in an HDHP. Keep in mind, in addition to being enrolled in a qualified HDHP, you cannot be claimed as someone else's dependent and you cannot have disqualifying additional medical coverage, such as a general purpose health Flexible Spending Account (FSA).

What are the tax advantages of opening an HSA?

The money you can contribute to these accounts is tax-deductible or pre-tax, and any increase in the value of your account is free from federal taxes — as are withdrawals for qualified medical expenses. Says Matarazzo, "One of the most important features of an HSA is that it's triple tax advantaged — when money goes into the account, when it grows and when it comes out."Footnote 1

How much can I contribute to an HSA yearly?

You can put money into an HSA every month you are eligible, until you enroll in Medicare benefits. After that, you're no longer allowed to contribute. When making HSA contributions, keep in mind these limits for 2018.
Maximum annual HSA contribution limits for 2018
  Under age 55 Age 55 and overFootnote 2
Individual $3,450 $4,450
Family $6,900Footnote 3 $7,900

What are my investment choices?

It varies. Some HSAs function as savings accounts only; others allow you to invest your contributions in a choice of mutual funds, giving your account the potential to grow. If you're thinking about making that sort of investment, consider your goals. Do you plan to use the account to pay for everyday health expenses in the short term rather than saving it for future anticipated medical costs? If so, then you may want to keep those funds in cash or investments that offer easy access to cash. Please note that investing in securities involves risks, and there is always the potential of losing money when you invest in securities.

Use the HSA Savings Calculator to see how your HSA account balance could grow over time.

Anticipating that you won't be using the account any time soon? Then consider mutual funds or other investment options better suited for the long term. Be aware that your account balance might have to reach a certain amount before your provider allows you to invest it in mutual funds, and you may need to maintain a certain cash balance in your account.

What will an HSA pay for?

A wide range of routine, everyday medical expenses qualify for coverage under your HSA, including:
  • Qualified out-of-pocket medical expenses you incur before you've met your deductible
  • Medical, dental or vision coinsurance and co-payments
  • Prescription drugs
  • Some medical treatments not covered by your insurance, such as visits to a chiropractor
  • Some kinds of medical equipment, like eyeglasses

How can I tap into my HSA funds?

There are a number of ways you can pay for qualified expenses with the cash in your HSA. While plans will differ depending on the provider, some HSAs will provide you with a debit card or checkbook that you can use to directly pay for qualified medical expenses. In other plans, you might be able to set up a direct transfer of funds from your HSA to your regular bank account to reimburse yourself for qualified expenses you've already incurred. You can check with your employer or the HSA administrator to learn about the available options.
In today's health care market, we all need to take a long-term view of health coverage.
— Roger W. Gray,
director, Health Benefit Solutions
Bank of America Merrill Lynch

Are there any time restrictions on my ability to use an HSA?

No, one of the great advantages of an HSA is that you're not required to take money out of it by any given date, such as the end of the year — you can save and may even be able to invest your balance until you need it. If you lose your job and continue insurance coverage under COBRA, you can use your HSA to pay your COBRA premiums.
Another plus: Even if you leave the employer that originally sponsored your HSA, you can roll the balance over to another HSA — either one offered by your new employer or an HSA you open yourself at a financial institution.

Can I use my HSA in retirement?

Yes, starting an account now, while you're in good health, could help you prepare for future health care costs in retirement — when your medical bills are likely to increase. Once you're 65 or older, your HSA can be used to pay for Medicare premiums for Parts A, B or D with tax-free withdrawals, as with other qualified medical expenses. You can even pay for non-qualified expenses, but you will need to pay regular income taxes on those withdrawals.
In addition, notes Roger W. Gray, director, Health Benefit Solutions, Bank of America Merrill Lynch, "You can also use an HSA to pay with pre-tax dollars for your qualified long-term care insurance premiums."

Are there instances in which an HSA is not necessarily the best choice?

An HSA may not be right for everybody. You might prefer to select a health insurance plan with a lower deductible, in which case you wouldn't be eligible to contribute to an HSA. Or you might, for instance, have other savings priorities — like building a general emergency fund — that leave little room in your budget for funding yet another savings account. Or if you're young and in good health, you might decide you'd rather devote any spare cash to investing in an IRA or other account dedicated solely to retirement.
But for many others, an HSA can be a useful solution for addressing some of the high costs of health care. "In today's health care market, we all need to take a long-term view of health coverage," says Gray. "If you consider the cost of insurance in combination with the potential savings provided by an HSA you may be better positioned to meet your medical needs — and possibly have money left over to help you meet your other goals."
Next steps

Merrill, its affiliates, and financial advisors do not provide legal, tax, or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
Footnote 1 Any interest or earnings on the assets in the HSA are tax-free while held in the account. You can receive tax-free distributions from your HSA, including distributions of interest or earnings, to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and, if withdrawn before age 65, death, or disability, may be subject to an additional 20% tax. You may be able to claim a tax deduction for contributions you, or someone other than your employer, make to your HSA. Bank of America recommends that you contact qualified tax or legal counsel before establishing an HSA.

Footnote 2 Applies to individuals who turn 55 or older during the tax year.

Footnote 3 In March 2018, the 2018 HSA contribution limit for individuals with family HDHP coverage was reduced from $6,900 to $6,850 in connection with changes to the calculation of cost of living adjustments under the Tax Cuts and Jobs Act. However, the IRS subsequently announced that taxpayers may treat the originally announced $6,900 limit as the inflation adjusted limit for 2018.

This material should be regarded as educational information on health care considerations and is not intended to provide specific health care advice. If you have questions regarding your particular situation, please contact your legal or tax advisor.

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