The HSA is actually pretty dope...

First, I’m almost 100% sure you are leaving money on the table if you have a health savings account (HSA). Here’s a link to the stuff that are Qualified Medical Expenses (it’s a lot of stuff).

Now, here are the details on HSAs and how you can crush using them…

A few years ago, my company introduced a high deductible health plan (HDHP). I didn’t know what to make of it and I was a little clueless. When you get an HDHP, you also get a health savings account (HSA). I was equally as clueless when it came to the HSA. This is despite the fact that I work in healthcare and I started my career as a finance advisor. You are not alone if you feel overwhelmed or out of the loop. It takes a lot of effort and info to sort out HDHPs and HSAs.

The basics…

  • A HDHP is a health benefit with an individual deductible of $1,350+ and a family deductible of $2,700+ (I’d argue that a $1,000 deductible is still “high” but the IRS drew the line at $1,350).

  • Normally, you’ll have a much lower premium with a HDHP, but you need to consider that you’re spending all of your own money until you hit the deductible. For example, if you have a sick visit at the doctor and it costs $150, then you are paying $150. BTW, 70% of people enrolled in a HDHP don’t hit their deductible. They are paying straight cash money the whole year.    

  • If you are enrolled in a HDHP, then you are eligible for an HSA. HSAs may be the best tax shelter in the IRS tax code. You can put $3,500 (individual) - $7,000 (family) into an HSA each year. These dollars go in tax-free, they grow tax free, and money comes out tax free as long as you are using them for Qualified Medical Expenses. Super dope!

  • Unlike a flexible spending account (FSA), you don’t have to spend all of your money in a given year. It can roll over year after year. Also, you can change the amount you contribute to an HSA at any point during the year. With a FSA, you can only change your contribution amount once during the year (during open enrollment).  

So what…

  • Most people think HDHPs suck because they have to spend their own money until they hit the deductible. I totally get this reaction, especially if they are used to paying only a co-pay of $10-$20. But the power of the HSA likely offsets this challenge. First, the money in the HSA is pre-tax. So, using your HSA account to pay for healthcare means you are getting a discount equal to your tax rate. Basically, you get to pay $75 on a $100 bill because you are using pre-tax dollars. Plus, you avoid paying FICA taxes on any money that you put in to an HSA.

  • The pre-tax benefits are good, but the real benefit of the HSA is investing and keeping those funds in the account earning returns tax free. For example, I’m 38 years old. If I start today and put $100/month into my HSA, my account will be worth $95,300 when I’m 65. It’s a brilliant way to save money for future healthcare expenses.

  • The key is keeping the money in the HSA. You do this by paying for healthcare with dollars outside of your HSA and keeping track of your spending because you get to pay yourself back for those expenses at any point in the future. For example, if I use my visa to pay for a $200 medical bill then I bank that credit, which I can redeem at any point in the future (3 months later, 3 years later, 30 years later…). That $200 will grow by 600% if I invest those dollars and keep them invested until age 65. If for some reason I need that $200 back immediately, I can simply pay myself back from my HSA account. Pretty much, you should never use your HSA debit card to pay for healthcare. At the very least, you should use your preferred credit card and get cash back, airline miles or something else.

  • Best of all, if you’ve had an HSA, then you have the opportunity to get your money back when you’ve bought things that are Qualified Medical Expenses. For example, have you bought sunscreen recently with your credit card? If so, it's a Qualified Medical Expense. Contact lenses? A filling at the dentist? These are all expenses that are recoverable now or in the future.

One thing I’ve noticed over the years is that rich people know how to play the tax game. Most of us don’t. This is a perfect example. Using your HSA correctly will literally create an opportunity for you avoid paying taxes. Lots of taxes. You just need to know how to play the game.

Until next time…Get Lit!