Managing Your Health Savings Account (HSA)

May 4, 2012 by Adam C. Powell, Ph.D.

I was recently asked by Matt Stroud of Reuters to comment on how to best manage health savings accounts. Some of my remarks appeared in his recent article. Those remarks were part of a larger overall piece that I sent him. My complete advice on managing health savings accounts is as follows:

The number of people eligible for Health Savings Accounts (HSAs) is growing rapidly, as more and more employers are choosing to offer High Deductible Health Plans (HDHPs), the health insurance plans that are used in combination with HSAs. HDHPs trade-off lower upfront premiums for higher deductibles in the event that medical care is needed, enabling employees and employers to reduce their upfront health insurance costs. According to America’s Health Insurance Plans (AHIP), HSA enrollment was at 11.4 million people in January 2011, up from 8.0 million when President Obama took office in January 2009. As HSAs were first made available in 2004, enrollment was at zero less than a decade ago. Since employers and families are struggling to deal with rising health insurance premiums, the growth of HSAs is likely to continue.

There are three key numbers to consider when managing money in an HSA: the deductible, the maximum out of pocket payment limit, and your the contribution limit. In 2012, the HDHPs necessary to quality for a HSA were required by law to have deductibles of at least $1,200 for individuals and at least $2,400 for families. Except for certain preventive services, HDHPs do not provide reimbursement for care until the deductible is reached. After reaching their deductible, people typically have to pay additional copayments and coinsurance on the care they receive, making out of pocket spending potentially quite a bit higher than the deductible. In 2012, the maximum out of pocket expenditure for in-network care on a HDHP was no more than $6,050 for individuals and no more than $12,100 for families. Thus, the true amount one may spend if very ill is far higher than the deductible. To assist people in paying for their care, the government allows untaxed money to be placed in HSAs so that it may later be used on medical expenditures. With a contribution limit of $3,100 for individuals and $6,250 for families, multi-year planning may be needed to achieve an HSA balance adequate to cover healthcare expenses up to the maximum out of pocket limit.

When deciding how much to contribute to an HSA, you should consider the deductible and maximum out of pocket limit of your plan, as well as whether you wish to use the account to help fund your retirement. As you will be responsible dollar-for-dollar for most care up to the deductible, it is important to try to keep at least the deductible saved in an HSA so that those expenditures can be made with pre-tax money. After reaching that savings goal, you may wish to contribute enough money to cover the in-network maximum out of pocket limit, so that if you require more care, you will be able to purchase it using pre-tax dollars. While you will only be partially responsible for medical expenditures beyond the deductible, unless you can pay them with money from an HSA, you will have to use taxed income to do so. Finally, if you are seeking an additional place to stash retirement funds so that you can grow them before they are taxed, you may wish to always contribute the maximum amount possible to your HSA, regardless of your anticipated medical expenditures.

As you can keep money in your HSA from year to year, it is okay to place money in the account that you think you are unlikely to spend on healthcare in the next year, as it can be used to cover future costs. Furthermore, you can use your HSAs as an investment vehicle in a similar manner to an IRA, as HSA balances can be invested. Money contributed to an HSA is sheltered from taxation until it is withdrawn and is not taxed if it used for qualified medical expenses. While money can be withdrawn for other expenses, it is subject to income tax at the time of withdrawal. An additional 20% penalty applies if you withdraw money for non-medical reasons, unless you have reached the age of 65 or are disabled.

The over 250% growth in HSA enrollment during the five year span between 2006 and 2011 is likely the result of a combination of people and employers attempting to reduce their upfront health insurance premiums, and people seeking a new way to save for their retirements. Given the rapid rate of growth in health insurance premiums that has occurred over the past decade, the growth of HSAs is likely to continue. While HSAs may not always be actuarially the best choice for people with certain patterns of medical expenditures, an increasing number of Americans are turning to HDHPs and HSAs to meet their health insurance and retirement needs.