Personal Finance

This savings account can help defray health costs — and you likely don't know much about it

Key Points
  • Health savings accounts allow you to put away money on a pre-tax or tax deductible basis, have it grow free of tax and take tax free withdrawals for qualified medical expenses.
  • About 8 out of 10 consumers who aren’t enrolled in these savings accounts are confused about how they work.
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If you haven't seen this tax-advantaged savings account offered alongside your health-care plan, odds are that you'll come across it this year.

Say hello to the health savings account, a way for workers to put money away either on a pre-tax or tax-deductible basis, have it grow free of taxes and then take tax-free withdrawals in order to pay for qualified medical costs.

Typically these so-called HSAs work in conjunction with high-deductible health insurance.

This coverage, which is also known as a consumer directed health plan, comes with a deductible of at least $1,350 for self-only coverage or $2,700 for family plans in 2019.

You cannot fund an HSA if you are on Medicare.

More than 9 out of 10 employers expect to offer high-deductible plans in 2019, according to a recent survey by the National Business Group on Health.

The association, which represents large employers, polled 170 companies in May and June of this year.

Here's what people are getting wrong about HSAs.

Alphabet soup

Doctor taking senior man's blood pressure
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Close to 80 percent of consumers who aren't enrolled in HSAs and other medical savings accounts don't understand how they work, according to Alegeus.

The company, a provider of HSA administration software, surveyed more than 1,400 consumers.

In fact, people who aren't in these savings accounts tend to confuse HSAs with another employee benefit, known as the health flexible spending arrangement or FSA, Alegeus found.

"People assume that they're all the same, and that's not true at all" said Steve Auerbach, CEO of Alegeus.

"The FSA is 'use it or lose it,' so you'll want to set aside what you need for that year," he said. "The HSA is structured around current and future medical costs and your ability to drive the dollars."

Contribution limits

In 2018, HSA holders may contribute up to $6,900 if they're in family plans, or up to $3,450 for single coverage. Individuals over 55 may contribute an additional $1,000 to their accounts.

In a situation where a married couple has family coverage under separate plans, but one is over 55, the two can split the family contribution limit of $6,900. However, only the spouse who is over 55 can make the additional $1,000 contribution, said Aaron Benway, a certified financial planner and co-founder of

Though someone who is enrolled in Medicare cannot contribute to an HSA, his or her spouse who is still employed and in an HSA-eligible plan at work may still save in the account.

"The spouse might be on Medicare, but they could still be covered under the private policy if the working spouse has family coverage," said Roy Ramthun, president and founder of Ask Mr. HSA. "The family contribution would have to come from the spouse who is not on Medicare."

Workers with FSAs currently can contribute up to $2,650 during 2018 and may do so on a pretax basis.

Any contributions your employer makes to your FSA is also excluded from your gross income. Withdrawals are tax-free if you use the money to pay for qualified medical expenses.


Here are a few key differences between the two accounts:

Remaining balances: You can carry over your entire remaining balance in your HSA into the next year.

Meanwhile, FSAs are "use it or lose it": Your employer may give you the option of carrying over up to $500 in remaining funds into the following year or give you a grace period of 2½ months after the end of the plan year to use the money.

Companies with FSAs can offer either carryover option or none at all — in which case, you would forfeit any unspent amounts by the end of the year.

Portability: If you leave a job where you participate in a plan with an HSA, you'll be able to take the account with you. This can create an opportunity for you to shift your balance to a provider with low-cost investment options.

This isn't so with FSAs.

Once you've parted ways with your employer, you can no longer participate in the FSA and you forfeit any balances left over.

Fund access: Employees participating in HSAs and FSAs have amounts deducted from their paycheck to fund the accounts throughout the year.

However, with FSAs, individuals who elect to make the full contribution — $2,650 in 2018 — are able to access that full amount at the beginning of the year, even if they haven't fully funded the account yet.

You can only tap your HSA balance to the extent that you and your employer have already funded it. The money needs to accumulate before you can use it.

Investing: Depending on where you hold your HSA and how much money you keep in the account, you may have investment options available to you. FSAs don't earn interest.

Because you can invest your HSA and carry the money over from one year to the next, you may be able to use it to help pay for health -care costs in retirement.

If you're planning on investing your HSA, be sure to keep an eye on your provider's fund lineup and the related costs, including investment expenses and account fees. High costs can eat away your returns over time.

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