If you play your cards right, health savings accounts can save you some serious money on healthcare. We can use this account to reduce our taxable income and put those tax dollars towards our health. But this isn’t just something you sign up for on a whim. First, we need to understand the rules of the game. But where do we start?
I suppose putting together a health savings account series was inevitable. Who knows, maybe Max is feeling a bit overconfident again. Then again, maybe I just have nothing better to do. But the time has come to spread the word.
I have thought about doing a series for some time now, but people in my bubble seem well versed on the subject. The good news is these days we are starting to see the Max Out of Pocket blog content creep outside of my bubble. Google is even starting to take notice. So, I thought, why not? I want everyone to know what I know.
If you have been paying attention for the last year or so, you probably got the hint that Max is a huge fan of the health savings account. Some might call it a borderline obsession. Frankly, aside from a good diet and exercise, I think it is one of the best plays some of us have against the out-of-pocket costs our fragmented healthcare system generates. We can also use it to pad our retirement strategy.
But notice I said, “some of us”. This is not for everyone. In fact, I want to go ahead and say it now. This strategy/system favors the young, healthy, and those who get started early.
Hey, don’t look at me. I don’t make the rules, I just follow them.
What is a Health Savings Account?
If the Max Out of Pocket blog is located at the intersection of healthcare and personal finance, then the health savings account has an office right across the street. But what is it and why is it important?
I am going to go ahead and risk kicking off this series with an Internal Revenue Service (IRS) definition directly from Publication 969. That’s a great place to look for information about health savings accounts.
A Health Savings Account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA.IRS Publication 969
The way I see it, there are three parts to this definition.
- We have a “special” tax-exempt account.
- We can use it to pay for certain medical expenses.
- We must be eligible.
A Few Other Things To Know
As long as we are eligible, we do not need to get specific approval from the IRS to open the health savings account. We can set it up with a bank, insurance company, or anyone the IRS approves of as a trustee.
As for eligibility, a big part of it requires you to be on a high deductible health plan like me. Our family deductible is $3,300. My high deductible health plan will run about $22,450 in premiums for 2020, but I only have to pay about $5,000 of that.
In my experience, the health insurance plan does not usually manage or offer a health savings account. That’s just not their thing. They generally use another company to administer the account. For example, your insurance might be Cigna, but the health savings account might be through Fidelity.
I currently use HealthEquity for ongoing contributions. I have nothing but good things to say about them.
How Long have Health Savings Accounts Been Around?
According to the United States Department Of The Treasury, the Health Savings Account was created way back in 2003. The goal was for individuals covered by high deductible health plans to get tax-preferred treatment of money saved for medical expenses. But the utilization of these accounts has been slow going.
Max was an early adopter. I have been a proud owner of a health savings account since 2009. Back then, only 6% of covered workers were enrolled in a high deductible health plan that also offered a health savings account. I have since accumulated over $50,000 in my accounts.
What are the Benefits of a Health Savings Account?
The IRS also does a great job outlining the benefits of a health savings account. I paraphrased their six reasons to consider one below. We will go over these in detail throughout the series, and highlight other benefits the IRS fails to mention.
- Federal tax deduction for contributions, even if you do not itemize.
- Contributions are sheltered from FICA taxes when done through a cafeteria plan.
- Contributions remain in the account until used.
- Interest and earnings are tax-free.
- Distributions are tax-free when used for qualified medical expenses.
- The health savings account is portable; you can take it with you when you switch employers.
How Many People have a Health Savings Account?
If you are anything like me, you might want to know what the market looks like for something like this.
The folks over at the Kaiser Family Foundation do an excellent job collecting data on this type of thing. They have been doing so every year for about 22 years. They recently released the data for 2020. Unfortunately, there is a ton of information in that survey, and, therefore, it probably does not get the attention it deserves.
According to the KFF, employer-sponsored plans cover about 157 million people.
Their 2020 survey reports that 24% of covered employees at all firms are enrolled in a high deductible health plan that also offers a health savings account. This is up from 15% in 2015.
If my math is right, that means almost 38 million people have some form of a health savings account. I am confident my blog can probably move this percentage over the next year or two.
157 million X 24% = 37.6 million people
Just to be clear in case the chart above confuses you, 31% of employees are on high deductible health plans with a “savings option”. However, some of those are covered by a health reimbursement account as their “savings option”. Those are different than a health savings account. Since this series is dedicated to the health savings account, we won’t be covering the health reimbursement accounts.
Here is a look at the same information based on firm size. Large firms tend to offer a high deductible health plan with a savings option more often.
The 31% in the bar graph on the bottom (dark area) ties to the 31% in the first table above for 2020.
A health savings account is a special account with special tax treatment. It allows us to pay down medical expenses with tax-sheltered dollars. They have been around since 2003. In 2020, approximately 24% of covered workers have a high deductible health plan with the health savings account.
But it’s not for everyone. There is a lot more to understand before you jump into a plan like this. I also need to mention there are some downstream impacts that high deductible health plans bring to the people actually providing healthcare services. This has been brought those up in our comments section a few times. It is worth noting and we will try to address those as we go.
Today’s post is a high-level overview of the health savings account. Hopefully, it piqued your interest. We can get into the weeds as the series goes on.
I am not a tax professional and this is not a recommendation to open a health savings account or enroll in a high deductible health plan.