What Is A Health Savings Account (HSA) Plan?
Health Savings Accounts (HSA) are special accounts that provide tax benefits when used to pay for medical expenses that are not covered by health insurance. These HSA plans are used along side high deductible health insurance plans (HDHP), or consumer directed health plans (CDHP), to provide a comprehensive protection plan that focuses the user on being a good shopper for health care needs.
These HSA compatible health plans started in 2004 and quickly became popular due to the low premiums. The money in an HSA plan can be used to pay for the qualified medical expenses that the insurance plan does not cover, such as deductible costs, office visits, prescriptions, eye care, dental needs, chiropractic visits, and acupuncture.
The primary benefits of a Health Savings Account are:
- tax deductible contributions into the account, and
- tax free withdrawals to pay for qualified medical expenses
- ability to let money in the account grow
- no requirement to spend the HSA monies
- at age 65 the HSA plan can be used like a traditional IRA
- at age 65 the HSA can be used to pay for Medicare premiums and medical expenses
How Do HSA Plans Work?
To use HSA plans effectively, it’s best to set up regular contributions into the savings account. The reason for this is to ensure that the money to pay for any necessary medical services is in the account prior to obtaining the medical service. If the money to pay for a qualified service is in the account prior to receiving the service, then the money can be withdrawn tax free to pay for the service.
If money is not in the account when the service is received, then you can not remove any future contributions to pay for that service without incurring a tax penalty and income tax on the withdrawn amount.
A good way to determine how much the regular HSA contributions should be is to look at what your previous year medical expenses were, and divide that amount by 12. To build up the account value for potential future expenses, you should contribute more than you expect to use each year. With HSA’s you never lose the money in the account if you don’t use it by the end of the year. The value can continue to build from one year to the next and will always remain in your control.
Who Qualifies For An HSA Plan?
To qualify for a Health Savings Account (the savings account that goes with HSA compatible health insurance plans) you must meet the following criteria:
- Must be age 64 or less
- Must have a HSA compatible health insurance plan
- Must not be claimed as a dependent on another person’s tax return
- Must not be enrolled in Medicare
If you meet these conditions, then you can open up an HSA and make contributions into the account.
What Are The HSA Contribution Limits?
|HSA contribution limit (employer + employee)||Individual: $3,300
|HSA catch-up contributions (age 55 or older)*||$1,000||$1,000|
* – You can make catch-up contributions at any time during the year in which you turn 55. Unlike other IRS limits, the HSA catch-up contribution amount is not indexed; any increase would require statutory change.
How Do You Find An HSA Provider?
HSA plans are typically held at banks, savings and loans, or credit unions. Most of these institutions offer HSA plans to members of the bank. Before you open an HSA, determine if you have to also have your primary checking or savings account with that bank in order to have an HSA. This should not be a requirement.
There are 2 main criteria to look for when deciding where to start a HSA plan. These criteria are ease of being able to contribute and withdraw from the account to pay for medical needs, and the overall costs and fees associated with the account. Obviously the bank you currently have your checking account with is potentially a good option for your HSA plan, because you are already familiar with moving money into and out of that bank. However, there may be other choices that would be a better solution for your HSA money.
Ideally you will want to be able to interact with the account online in order to do transactions, and by phone if you have specific questions. Most HSA plans will offer a debit card you can use to pay for medical services. Look for any monthly maintenance fees or annual custodial fees that the bank charges you to hold your HSA with them. These fees should be zero, or very low in order to maximize the benefits from the account.
Don’t get hung up on trying to find an HSA provider with the highest interest rates. You will end up with better overall results if you focus on minimizing the monthly fees and annual custodial costs even if the account earns a lower interest rate.
As an example, let’s say you find a plan with a 1.25% interest rate, and they charge a $25 annual custodial fee and a $3 monthly fee. Then you will have to have a minimum account balance of $4880 in order to break even and have the interest earned equal the fees and charges you pay. Conversely, if you find a plan with a 1.0% interest rate that also has a $25 annual custodial fee, but no monthly fee, then you will only need $2500 in the account to break even. With lower account balances, HSA plans with no annual or monthly charges and only paying 0.25% interest will be a better choice.
Here’s a good resource that let’s you search and rank HSA administrators by their HSA plan yield:
I know we said not to focus on interest rates, but this is one of the only tools available online. You’ll need to be careful to make sure you are eligible to join the HSA providers listed in the results.
For more HSA Providers I have created a list of administrators, both local to California and Nationwide, along with links to their websites. Clicking this link will create a popup window.
California HSA Administrators
Who Are The Recommended HSA Providers From The Insurance Companies?
Each health insurance company in California has a preferred HSA provider they recommend. In some cases the relationship between the insurance company and the HSA plan provider offers additional benefits or ease of use. You’ll want to review the option provided by your HSA insurance company. A key point to remember is that you do not have to use the preferred provider to get the HSA tax benefits. You should always look at other options to make sure that you get the best plan possible.
Here are the current HSA Administrators the insurance companies are promoting.
- Aetna – Bank of America – no set-up or monthly fees if you have an Aetna health insurance plan
- Anthem Blue Cross – Affiliated Computer Services and Bank of New York Mellon – $2.95/mo fee, $15 one time set-up fee
- Blue Shield of California – Wells Fargo Bank
- Cigna – JPMorgan Chase
- Health Net – Bank of America – Merrill Lynch – $3.50/mo fee, no set-up or custodial fee (EZ Access HSA)
- Kaiser – none
- SeaChange — Sterling HSA
Additional Health Savings Account Resources
Best HSA Health Insurance Plans In California
http://www.irs.gov/pub/irs-pdf/p502.pdf For more details about what the IRS considers “Qualified Expenses”
http://www.irs.gov/pub/irs-pdf/p969.pdf IRA tax rules for HSA plans
Health Savings Account (HSA) FAQ