How does a health savings account work and do you need one?

Health insurance is probably not on the top of anyone’s list of favorite subjects to discuss. But what you might not realize is that there are options within your insurance that may be able to help you save money—which, of course, is a favorite thing for everyone. So if you’re wondering what a health savings account is and if you could benefit from one, keep reading: we have some answers for you.

What’s a health savings account?

Put simply, a health savings account, or HSA, is an account that is essentially designated for medical expenses, funded by your own contributions and often contributions from your employers. Much like health insurance, you set a monthly percentage aside in your HSA fund to use as needed for doctor’s appointments, medical tests, lab work, and other related items.

Can everyone have one?

In order to contribute to an HSA, you need to be enrolled in a high-deductible health plan (HDHP) for your health insurance. An HDHP is essentially an insurance plan that usually lowers your monthly premium payments but will likely increase your deductible, meaning you pay for more healthcare services or items until your deductible has been met for the year.

Why would I increase my deductible?

An HDHP may seem counter-intuitive, but in conjunction with an HSA, it can be very beneficial. You can pay toward your deductible with your HSA funds, meaning you are essentially only using money you have designated for healthcare and not spending out of your other financial resources.

Who does an HSA benefit most?

Whether you need or would benefit from an HSA depends on a few factors, including:

  • Your health
  • Your budget
  • Your age (i.e. how close to retirement you are)
  • Your job

Not everyone wants or needs an HSA to cover their medical expenses.

Who should avoid an HSA?

Again, deciding to open a health savings account depends on a lot of your individual needs and circumstances. But for some people or families, an HDHP/HSA may not make as much sense. For instance, if you have a chronically ill family member that requires a lot of tests and specialized appointments, it may be more difficult to pay the higher deductible on top of the out of pocket expenses, even if you utilize your HSA. On the other hand, if you have a family member who requires regular testing that is always expensive, you may meet your deductible earlier than you think, meaning you will be able to enjoy the benefits of lower monthly premiums. You are the only one who can decide which scenario best applies to your situation.

How do funds get to my HSA?

The amount you decide to contribute to your HSA is up to you—consult your budget and see how much you think you can add each month without compromising other financial needs. You will work with your employer to set that amount and can speak with an HR rep to learn what the company average is to give you a starting point. Your company may also contribute to your HSA fund—many companies often match your contribution up to a certain percentage, meaning it may be worth it to do contribute a little more of your own paycheck if your employer is going to add more, too.

What if I don’t use it?

You may have a banner year with few visits to the doctor, which is what everyone hopes for. In this case, you may not use all of your HSA funds, but no need to worry—those funds will roll right over into the next year and remain available for your use. The HSA funds also stay with you even if you change jobs, meaning you can start saving now for a lifetime.

What are the pros and cons?

Pro: Having designated funds for healthcare may allow you to seek treatment that would be otherwise financially unavailable.

Con: Because funds are added monthly, it can be tempting to skip appointments or avoid testing because you want to wait for HSA funds to be available. Your healthcare provider can tell you what can wait for now and what needs to happen immediately.

Pro: The money in your HSA account is yours to spend. You are not obligated to see a specific medical practice or use certain medication brands—you have a choice.

Con: In emergency situations, you will need to receive treatment from the closest medical facility available, which may not be one you have budgeted for. Try to leave some extra funds in your HSA when possible.

Pro: The money you contribute to your HSA is tax-free, meaning you will get the full value of each contribution.

Con: Health is hard to predict. Just because you have an HSA doesn’t mean you shouldn’t have a plan for your health expenses outside of your HSA funds. Hope for the best but always plan for emergencies.

Using an HSA can be immensely helpful for many people, so talk to your employer this week about whether that’s an option for you and how you find out more information. Remember, your budget is always up to you—don’t trade necessary expenses for additional funds. Look at your finances, review your health history, and learn how an HSA may make a difference for you.

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