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What is an HSA? How to know if this health savings plan is right for you

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You may have heard about the many benefits a health savings account (HSA) can offer, such as pre-tax savings for qualified medical and health-related expenses. Still, some of the greatest benefits of an HSA are less well known, such as its use as a long-term savings or investing vehicle. It's also easy to confuse an HSA with a flexible spending account (FSA), which can also offer some, but not all, of the same benefits.

An HSA can be especially useful during the Covid-19 pandemic, and during 2020 open enrollment season when individuals are required to make health-care plan decisions, it's worth learning the basics. Don't forget that HSA plans are linked to high-deductible health insurance options, and must be opted into either during open enrollment, or upon a qualifying event. Open enrollment for ACA marketplace plans generally ends on December 15, but workplace plans have varying enrollment periods. Check with your HR department to verify the precise periods for enrollment.

Differences between an HSA and FSA 

An HSA is a tax-advantaged account to which you and/or your employer contribute funds on a pre-tax basis (your taxable gross income is reduced by the amount of your contributions). These funds can then be used to pay for a variety of medical and health-related expenses on a tax-free basis. Unlike its cousin, the FSA, funds in an HSA roll over from year-to-year, so you don't lose any unused funds. Any interest or earnings in the HSA account are tax-free. Keep in mind, however, that you can't have both an HSA and FSA plan, so if given the choice, it's important to consider both thoroughly. 

In 2020, you may contribute up to $3,550 per year for an individual and $7,100 per family into an HSA. The qualified expenses for which you may use HSA funds run the gamut, everything from prescriptions, to contact lens solution to mental health visits and out-of-pocket major medical costs. 

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To qualify for an HSA, you must have a high deductible health plan, with a deductible over $1,400 for an individual, or $2,800 for a family. Many employers offer such plans (as well as HSAs to complement them), but you can also purchase a high deductible health plan on the open market, such as on the ACA exchanges. Many banks and brokers offer stand-alone HSA accounts for individuals who obtain their high deductible health plan outside of their employer. 

HSAs as a retirement savings vehicle 

Since HSA contributions can be rolled over from year-to-year, any unused money in the account can continue to generate interest and earnings tax-free. Many HSA plans also offer the opportunity to invest all or part of your balance in mutual funds or other investment vehicles, allowing you to better manage your money's future potential. HSAs are also portable, meaning you can keep them, even if you switch jobs. 

In effect, an HSA can be viewed as a supplementary retirement savings tool, similar in some ways to an IRA. While any distributions taken prior to age 65 for non-qualified expenses face a 20% penalty and taxes, those taken after age 65 incur no penalties (but are subject to tax). As always, qualified medical and health expense distributions are free of any penalties or tax. And due to the Covid-19 pandemic, you may now also use HSA funds to pay for COBRA insurance continuation premiums if you lose your job.

In short, HSAs offer a great deal more flexibility than FSAs, so if given the choice, you should usually opt for the HSA whenever it is available. 

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