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How Health Savings Accounts Work

Jeff Blyskal

Republican plans to repeal and replace the Affordable Care Act have not yet been finalized, but many of the ideas being floated around Washington share a common feature: expansion of health savings accounts to more consumers.

A health savings account, or HSA, is a tax-exempt account available to people in certain high-deductible health plans to help pay for out-of-pocket medical expenses. To open an HSA today, your annual deductible must be at least $1,300 for an individual or $2,600 for a family—but deductibles in such plans can be, and often are, higher than that.

HSAs are different from flexible spending accounts, or FSAs, although they have similarities. FSAs, which an employer must set up, let people set aside up to $2,550 pre-tax to pay for health expenses. You can’t contribute to both an HSA and a FSA.

There are currently 20 million active HSA accounts in the U.S., but expansion plans could increase that number significantly.

House Speaker Paul Ryan recently said that legislation to repeal and replace the Affordable Care Act will be introduced in the House when Congress comes back from its break on February 27th. A leaked version of that plan published Friday on Politico, and it would allow individuals to contribute more to an HSA than current law permits.

A separate plan introduced by Senator Rand Paul in January would allow individuals with any type of health insurance—regardless of the size of the deductible—to open an HSA.

Not everyone thinks expanding access to HSAs is a good idea.

“The HSA-expansion proposals disproportionately benefit wealthy Americans by offering them tax breaks,” says Maura Calsyn, managing director of health policy at the Center for American Progress, a nonpartisan policy institute. “But they do nothing to increase coverage for poorer people who don’t have any extra money to put aside.”

Since HSAs require consumers to have extra income to store in the account, they provide little help to those already struggling to pay for their health insurance in the first place. Meanwhile, wealthier people who can stash money in an HSA could get a giant tax benefit. And HSAs also rely upon consumers to accurately predict their medical spending each year.

"To ensure consumers can get the care they need, when they need it, requires comprehensive solutions," says Laura MacCleery, Vice President of Consumer Policy and Mobilization at Consumers Union, the policy and action arm of Consumer Reports. "HSAs shift the risk to consumers to pay for care that should be routinely covered by insurance, and serve the needs of a select few, while missing a chance to lower everyone's costs by providing the security of comprehensive coverage for all."

However you feel about HSAs as a matter of national policy, you may find yourself considering one in the near future. Or you may already have one and be wondering if you can get a better deal. Here's what you need to know to find an HSA that suits your needs.

HSA Basics

About 24 percent of companies providing health benefits offer HSA-qualified high-deductible health plans. Some companies only offer high-deductible plans. However, some people with access to multiple employer-provided plans still choose these high-deductible plans because they prefer to pay lower premiums and assume they’ll stay healthy and save money this way. If your employer offers a high deductible health plan, it may also contract with a bank to host an HSA and will set up an account for you.

But you can also open up your own account. Hundreds of banks and credit unions offer HSAs, and because the interest rates they pay, fees they charge, and features they offer can vary, it can be worth it to shop around. And HSAs are portable. "If you're not happy with your HSA provider, you can move to another one at any time," says Eric Remjeske, president and co-founder of Devenir, a Minneapolis-based HSA consulting firm.

Devenir offers an online HSA search tool, which lets consumers compare more than 350 providers. Often, if you switch from one HSA provider to another, the HSA you are transferring to will pay any exit fees charged by the HSA you are leaving.

You can direct your employer to contribute your pre-tax earnings into any HSA you designate, currently up to $3,400 a year for individuals and $6,750 for families.

"Whatever you contribute leads to immediate significant tax savings, and as long as you spend the money on qualified medical expenses, it's tax-free when you use it," says Greg Geisler, associate professor of accounting at the University of Missouri–St. Louis.

Such expenses include doctor visits, surgery, prescriptions, and physical therapy.

Keep in mind, also, that there's no requirement to spend the money in an HSA in any given year, as there generally is with flexible spending accounts. That means that if you can afford your current health care expenses, investing in an HSA now can help fund your health care costs in retirement, when they are likely to be higher. If you don’t spend it all, your heirs will inherit the balance.

Key HSA Features

Look for these key features when shopping for a better account.

Investment options. Many HSAs offer a savings account only, with no investment options. That's fine if you anticipate spending all your HSA money each year, as most people do. But if your balance accumulates, you may want to consider an HSA that also that lets you invest your money in certificates of deposit, mutual and index funds, and self-directed brokerage accounts, for example. Such options could lead to higher annual tax-free returns. But you need to be aware that some funds may charge fees and that fund and brokerage options are not FDIC-insured. Also, your investments can lose value due to stock market ups and downs and other risks associated with equities.

HSAs that offer investment options usually let you start investing after your account balance reaches $1,000. At BB&T Bank, the nation's 11th largest bank, you need a balance of at least $3,500 to invest. But not all banks have such high thresholds, HSA Bank, for instance, has no minimum balance requirement.

Convenience. While the average person with an HSA uses the account to make only 13 transactions per year, according to a survey by Devenir, it can be useful to open an account that offers a variety of payment options and services.

While most HSAs provide a debit card for you to pay your health care expenses, some HSAs also let you pay by paper check or online bill pay. To help manage the money in your account, some HSAs let you use a smartphone app, some offer a service that will automatically sweep excess funds into the investment options you've chosen.

Online digital receipt storage. You need to carefully keep your receipts for qualified medical expenditures to ensure the tax-free status of your HSA dollars–in case the IRS audits you.

Instead of putting them in a shoebox, some HSAs such as HSA Bank, Optum, and SelectAccount offer a digital receipt archive where you upload scans or photos of your receipts.



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