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Health Savings Account: What is an HSA and how to use it?

Summary

In today’s episode, I’m interviewed by Matt Robison in his on-air radio show Your Money - where we talk about Health Savings Accounts or HSA. What is this type of account? And how does it work? And be sure to listen to the end where we talk about how investing in your HSA can save you thousands of dollars. 

Topics Covered

  • What is a Health Savings Account (HSA)
  • How do you qualify to open an HSA?
  • How do you contribute money?
  • How do you invest the money in your HSA?
  • What medical expenses qualify for use in an HSA?
  • How much money can you save?
  • What is the best way to use an HSA?

Photo by Dan Gold on Unsplash

Transcript

Matt: And our guest is Mike Morton of Morton Financial Advice. Mike, welcome. 

Mike: Thanks, Matt. It's great to be here 

Matt: Today. We want to talk about something that's on all of our minds, unfortunately, over the past year, how do you save and prepare for health expenses? So we want to talk about health savings accounts, how we use them, what they're good for, how you should think about them and to get into it.  Mike. What is a health savings account?

Mike: Thanks, Matt. It's a great topic. The health savings account is a tremendous tool for consumers to pretty recent change in legislation over the last few years. And I absolutely love HSA is health savings accounts or HSA is, and we'll get into the benefits of why they're so great for consumers, but let's start with the basics as always a health savings account or HSA is an account.

So it's an account, just like your checking or savings or brokerage account. It's an account that you own in your name. So that's just as important to realize that it's an account that could have money in it. And it is an account that is owned by an individual. Now, just like other accounts that has certain benefits and limitations.

And so we'll talk about those. But the first thing is that the HSA, are always paired with a high deductible health plan.  You can't have an HSA or you can have an HSA, but you can no longer contribute to it. Unless you have a high deductible. Health plan. And so that's why you hear those often paired together.

And of course there are limitations of how you can use these because there are certain benefits as well. So the IRS has gotten limitations and benefits about how you can put in money, how the money could be used coming out the other side. So we'll get into all those details. But the first setup is really understanding that it's an account that you own.

Matt: I see. Okay.  Want to hear about all the benefits but let's just talk mechanics for a second. How do I get one of these? 

Mike: Yeah, absolutely. Like I said before, if you have a high deductible health plan, then you have access to an HSA.  And so what does that, high deductible health plans, these are where the deductible is typically higher than average health plan.

That's why it's called an HDHP high deductible health plan. So the IRS has set limits for these and the minimum deductability for high deductible health plan. If you're a single it's $1,400. And if you're a family it's $2,800. So remember that deductible is how much you're going to pay. Before a lot of the insurance kicks in, it's how much debt you have to put in.

And so that's the minimum for high deductible, right? It's gotta be higher. So 1400  for single 2,800 for a family. And then also there's out of pocket maximums. All right. So this is once you hit the deductible, you still have, might have co-insurance payments and other types of payments that are coming out of your pockets, even though you hit that deductible maximum for a single $7,000 and for families, $14,000, these are defined by the IRS for a high deductible health plan.

Now just because you have those limits doesn't mean it's necessarily still eligible for an HSA, but pretty much it will be. And then a lot of the plans, of course, you will see from your most people have it through their employer and it will be pretty upfront if they have HSA is available because it is such a great tool they're going to want to market that.

So you can just look for the term HSA in your employee benefits package to see if your health plan qualifies. To have an HSA. 

Matt: I see.  Yeah the first thing I could do, if I'm interested in this is just check out my own plan, see what those numbers are, see what the deductibles and the out-of-pockets are refer back to those guidelines that you referred to.

And then the next thing I could do is I could ask my employer if it's not obvious and whatever documentation I'm given with the insurance plan Or I could ask, of a financial advisor. Is there anywhere else I could go to just find out, definitively yes. You qualify.

Yes. You can get one 

Mike: Yeah. Plan documents. We'll definitely have that. So either through your employer, the benefits package, like I said, they're going to highlight, if it comes with an HSA. Typically, most likely they will.  If you purchase it individually, a lot of them say HDHP, that's the high deductible health plan.

Plus HSA, they're going to reference HSA is in there, but if you don't see it, just pull up the plan documents, either online or whatever they send you and start checking in and you can check directly with the plan sponsor of course, to figure out if you're eligible for an HSA.

Matt:  Got it.

All right. 

So let's assume. I've got it. I have an account. It's a health savings account. What's next. How do I get money into it? Is that something I do? Does my employer take care of it for me? Or actually put money into it? 

Mike: Yeah, it could be either. It can be the case. So once you have an account in your name and you have that high deductible health plan, then you can put money into it or your employer can put money into it.

All right. And so there are limits to how much money you can put it. And the reason there are limits is because we're getting tax benefits. So the HSA is coming with a variety of tax benefits. It's one of the best accounts for saving on taxes. You get to keep more of the money and that's why it's such a benefit.

However, of course the IRS is going to limit. How much you can take advantage of this, just like your individual retirement accounts, your IRAs, you can only put in a certain amount of money. You can't just shelter hundreds of thousands of dollars a year. The IRS has limits to how much you're allowed to use these accounts.

So the limits for individual you can put in $3,600. In one year, 3,600 or for a family it's double that $7,200  you can contribute that amount. 3,600 or 7,200 for the year 2021. Now, where does the money come from? Is it out of my pocket, out of the employers? It could be either the employer could put in the whole amount and that would be great.

I liked that job. Or they might just put in some, or even none, they might just offer it and say, but we're not going to contribute to it. Most employers do some, I would say a lot of employers do some because that's the benefit they're saving on premiums with these high deductible plans. And so they give back, a thousand, a couple thousand bucks and put it in the HSA for you.

So they might do some, you can do the rest. So that's important to know that whatever your employer is doing, you're alive. I, to put in up to that maximum, just out of your pocket, from your savings account, from your paycheck, each pay period or even at the end of the year, just like an IRA, you could top it up at the end of the year, or even in the first quarter of the following year to top up that HSA those contributions.

Matt: I see. So it sounds like it's a good thing. Now that you've teased us with the amount of benefit that you'd get out of this, it sounds like it's a really good thing. If you've got one of these accounts to keep an eye on how much might be coming from your employer and how much headroom you have.

To go before you hit those caps to make sure you're taking maximum advantage of the benefits, 

Mike: Exactly right. If you have the capacity for maximizing these accounts, you definitely want to do that. Cause just imagine , when you go and spend the money, which we're gonna talk about, how do you spend this money?

It is for medical expenses, right? Obviously this is for a health savings account. So it's for health expenses. When you pull that money out, you're saving the tax on the input, right? So if you put in 7,000 and you spent all 7,000 on medical expenses, you just saved whatever tax bracket you're in the 24% tax bracket and you put in 7,000.

Okay. You just saved over 1500, almost $2,000. Off the top. And so that's why, yeah. You want to use these accounts because you were saving 24 cents on the dollar for every dollar that you're putting in that you will use towards health expenses. 

Matt: Wow. So it's  it's almost like getting a free bonus view.

Let me put it another way.  If you are pretty confident that you are going to spend that amount on healthcare, up to the cap, it's almost like. If you can possibly manage to front that money into the health savings account, you might as well because it's almost like getting cash back it's almost, getting like a free MRI or whatever 

Mike: it is.

Yeah. All your medical expenses are 25% off. If you're again in the 24% tax bracket or 22%, all your medical expenses are 22% off. And we'll talk about it in a minute here that even if you're not going to spend the 7,000 this year, You still want to put in that money? Because you're going to, you're going to save it and you're going to save even more in the future.

So these are tremendously useful accounts. 

Matt: So now you said before that you should think about them, like accounts. Does that mean, let's say I do put in the money this year. I don't use it immediately. Does it just sit there? Am I earning interest on it? 

Mike: . So these are an account and that's why I really try to drive that home at the start because you have to treat it like an account.

You can just leave the money in there, just like your savings account. And you might just get a 0.1%, right? We're not getting too much on savings accounts these days. So the money would sit there and maybe You would just keep up with the cost. These accounts cost a little bit more than your savings account.

We're all used to free checking and savings. Now costs me nothing to have, just store a hundred bucks in the bank. These ones might be five bucks a month. They do have some expenses. And so they pass that on to you. So the money can just sit there and get a little bit of interest. However, you can invest this money most, all places that you have in HSA.

Allow you to take that money say you've grown it to a thousand dollars or a couple thousand or even 7,000, and you can invest part of that money. You can invest it in stocks or bonds or different funds up to some limits. Of course, they usually have an amount of cash that you need to keep on hand.

They usually want 500 or a thousand or even 2000. Kept in cash. But if you have a balance above that, often you have the opportunity to invest that money. And again, that is a great way of using this account for the upcoming years 

Matt: now. Just so I'm clear, you said that you have these caps per year. So what happens at the end of the year?

Is this a use it or lose it situation? Is this evaporating? Do I lose it if I haven't spent it at the end of the year? 

Mike: . This is why I love these accounts so much more than the FSA flexible savings account. People may be familiar with the FSAs. Those will have certain limits for rolling over. You have to use the money that year.

You can only roll over a few hundred dollars. These accounts, again, it's your account, your money. So if you leave your job, if you move on to something else, you get a different health care. It is your account. You get to keep it. So even if your  , healthcare plan changes in the future if you've got a few thousand dollars sitting in an HSA, it just sits there.

It comes with you. It's your account forever. 

Matt: Wow. I am beginning to see the picture here of why you like this so much. I'm also meeting to see why the folks who designed this whole tax policy didn't want it to be like a hundred thousand dollar cap. You could, you're getting a lot of benefit out of this.

Mike: Yeah, this is the only account that gets triple tax benefits. We've talked about how the contributions go in there. Tax-free. So your contributions and the way that works is if the employer puts in all of it, it just never is going to show up on your paycheck or it'll show up. And it won't be part of the taxable income.

   And if you put in money, say I put in all $7,000 for my family, $7,200. When I go and file my tax return,   it's take off the 7,200. It's just like a contribution to a traditional IRA. It is not taxed. And so that's how that works on the contribution side. So again, we're saving taxes, we're contributing money.


So we get to put in all $7,200, then any growth within the company, we invested in stocks and bonds and they go up and we decide to trade or,  do whatever we do within the account or the interest, any of the growth, any of the capital gains, all of that dividends are all tax-free. So  again, just like your retirement accounts.

It's all tax-free within that account. So if it grows year to year, hopefully you've put, put it in something that's that goes up steadily over time. Then you get that all tax-free. Then when we go withdraw the money.  . And we're going to use it for medical expenses . , we had, a surgery this year, whatever it is, we pull that money out as a hundred percent ours.

We do not owe any taxes if you use it for qualified medical expenses. So again, tax-free so it is the only account that exists that has that triple tax benefit. No taxes on the way in no taxes on the growth, no taxes on the way out. 

Matt: And of course, one way to think about taxes. At least the way I was always taught to think about it is in terms of what is the government trying to incentivize, what are they trying to get you to do?

And it sounds like they're really trying to incentivize companies to provide these, to make use of them companies save money on the contributions that they may make. And they're trying to incentivize. Us as consumers to use these accounts, to save within them, to trade within them and then to withdraw the money and use them for medical costs.

And it's a self-reinforcing cycle of incentives. 

Mike: Yeah, I would say this actually, I think the incentives are really to be in control of your health care costs. We all know healthcare costs are just out of hand in this country. They've been going up by massive percent every year. That's compounded for the last 10 or 20 years.

Healthcare is a massive expense in this country and it's a very complicated system. So the HSA is a way by having a higher deductible. You are in charge of how to spend that money. Geez, I'm going to be spending $1,400, $2,800, before my insurance is kicking in, should I go in for those routine visits?

Am I really that sick? Could I just take some over the counter medicine, and ride it out a little bit. You're in charge. You're in control and the same with the HSA. Here's the money. Here's a couple thousand dollars. You decide how you want to spend that money   , best how to spend it on your medical expenses and what the best care for you is.

And so it's putting the power in the consumer's hands to decide how to spend dollars in the medical system, rather than the government just providing lots of free services and everybody could potentially use them. So it's just shifting that a little bit, and I think it's a really good shift. 

Matt: So let's talk about what we can use the money for.

 Let's say I go to the doctor in the w hopefully we'll approach the time that we can do that regularly. Without concern. So let's say I have a copay and then my doctor prescribed something. So I've got to pick that up. Can I use the HSA for that kind of thing? Yeah, 

Mike: absolutely. So the umbrella of what you can use it, it's gotta be qualified medical expense, but the umbrella is super big.

All right. So basically anything you would think of as Oh, this is, related to the doctor experience and the medical and the prescription and the co-pays and the co-insurance is all covered. All right. So all of that stuff, and even there's a lot of other stuff that's covered as well. Lots of dental work, lots of vision.

, eyeglasses hearing AIDS, even physical therapy can be covered. It covers a lot that you can use this HSA. So if you're at all wondering, could I use it for this, go to Dr. Google, put in a little Google search, qualified medical expense HSA, and you will see it's just tremendous number of things that are covered.

So it's pretty awesome

Matt:  just for our listeners, just as a kind of shorthand what could they expect would not be covered? 

Mike: . So a few things that would not be covered just to be aware of are over-the-counter supplies. So you can't just go in and get some like aspirin or band-aids and stuff that those things are not covered.

Elective cosmetic surgery. So if you decide to go in and do something, now, if it's prescribed, cosmetic surgery that is covered,  but if it's elective that is not covered healthcare fees, health club fees and dependent care, kids childcare and stuff like that.

So things, they're not exactly healthcare and medical expenses are not covered, but those are a few of the big ones that you just want to be aware of.

Matt:  Now, one of the things I've observed with a lot of programs, a lot of benefits that are offered by companies even programs that I'm signed up for through companies is that they're all designed to be a pain in the butt.

Is this a pain? How do you actually go through the process of using the money? Do you have to save receipts, fill out forms.

Mike: . Typically what I've seen most often is that you get a debit card, so they make it super easy for using that. So you can just take your debit card and swipe that for the co-pay at the office, or when you go and pick up a prescription, you just have that, that HSA debit card with you. And and it's really easy.

But otherwise, sometimes if you don't get the debit card, , they can give you some checks. That you could write off of the accounts or , they have forms where you have to go through the reimbursement, which is definitely a big pain. So hopefully yours will come with that debit card that makes it really easy to use.

So 

Matt: you mentioned to me before we started recording this, that you calculated that one year of  using a health savings account can give you over 6,000 bucks in your pocket. I know we talked about the three sources, the triple benefit, the triple play that you outlined before, but how do you get to 6,000 bucks?

That's a pretty good enough. 

Mike: Yeah. So this first recognize, like we talked about before, if you're going to spend it within that year, say you're a family and you say the 7,200. And you're in the 24% tax bracket. That's $1,600 right there in your pocket that you saved. All right. So that's a tremendous savings, but how do we get to even more than that?

This is why I love these accounts. Here's the way that I often recommend to my clients to use these accounts. If you're already saving in your retirement accounts, right? You get net tax deferment or tax-free if using Roth. That's great. If you have some extra savings capacity, you could use the health savings accounts.

It is another tax, as we've said, the only triple tax benefit account. So you can get tax-free going in tax-free growth. Tax-free on the output side. So say you can put in that $7,200 as a family and you put it in there and you decide , I didn't really have medical expenses this year.

So I still have the $7,200. I'm going to let it ride. All right. So I'm going to let it ride for 10 years or 20 years, and I'm going to use it way later.  . That's a possibility, it's your account. It's just like a retirement account. You can just let it ride for a decade or two and then use it for qualified medical expenses down the road.

So if you take that 7,200 and you get a rate of return, about 6%, just taking sort of an average 6% return for 20 years, you just made over 6,000, almost $7,000. Just from that single year of investments. 

Matt: Wow. And just so I make sure I heard you right there. You can save for 20 years. You could do good.

Hold on 

Mike: for 20 years. Yeah. So here's the thing about these accounts, Matt, you're going to love this. So you talked about saving receipts, right? You definitely want to save your receipts. So again, here's what I recommend to my clients that, that can do this. Save your medical receipts today and pay for it out of pocket.

Now you take the tax hit. Now you're not getting the tax benefit, but you're getting a tax benefit of compounding growth for the next 10 or 20 years. But why save the receipts? We'll save the receipts, Matt, because you can pay yourself back out of this account. So say you had that two or $3,000 surgery, out-of-pocket expense, but you pay it from your normal check-in savings account and you keep the money in your HSA.

It compounds. Tax-free for 20 years. And then you say, once it's doubled, then you can pay yourself back that 2000 bucks. 

Matt: So you've essentially what you're saying is that the government has invented a hot tub time machine for health savings that I can teleport to the future, , my expenses today and make money 

in the process.

Am I right?

Mike:  Yeah. That's exactly where, it all makes sense when you break it down piece by piece, but you get the, compounding growth is something that's hard to wrap our human minds around 10 or 20 years. I can't, I don't even know what I'm eating for lunch tomorrow, let alone where I'm going to be in 20 years.

So it's pretty hard to do that. That's why we use a lot of software and spreadsheets when we talk about these things, but yes, . The important thing is to save your receipts, put them in a file, scan them, keep them somewhere. And , if you grow your HSA to a pretty large amount, which can happen with compound and growth, then you can pay yourself back.

If you don't have enough,  medical expenses in the future, which. You might 

Matt: I am super sold. So for all our listeners, check out, if you qualify for one of these amazing accounts, Mike Morton, thanks so much for running this down 

Mike: for us. You bet. My pleasure.