Exploring their healthy benefits
If you are enrolled in only one health insurance plan and it has a high deductible, you are probably eligible to open a Health Savings Account (HSA). An HSA is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. The deductible is the dollar amount you have to pay before your insurance starts picking up certain costs. By using untaxed dollars in an HSA to pay for deductibles, copayments, coinsurance, and some other qualified medical expenses, you may be able to lower your out-of-pocket health care costs. HSA funds generally may not be used to pay premiums.
Your employer may offer a High Deductible Health Plan (HDHP), or you may purchase an HDHP on your own. Once you are enrolled in an HDHP, check to see if an HSA was automatically opened for you by your insurer. If not, you can open one with a bank or another financial institution that offers HSAs.
If you are enrolled in an HDHP and have, or were offered, an HSA and are interested in learning more, here are some basic points.
Compare the benefits and the limitations
By having an HSA, you can set aside funds on a pre-tax basis—meaning that if your employer allows payroll deductions to be paid directly into your HSA, that income is not taxed—to pay for qualified medical expenses, including dental, prescription, and vision expenses. Money can also accumulate in the account from year to year; unlike many flexible spending accounts that do not allow you to roll money over to the next year, if you don’t spend it all that year. With an HSA, you can use that money to avoid a shock to your finances from a sudden large medical bill.
Another benefit of having an HSA is, if you use pre-tax dollars to fund your HSA, you can claim a tax deduction for your contributions to the account, even if you don’t itemize your deductions. An HSA may be particularly helpful if you’re expecting an upcoming medical expense like a planned surgery, new eyeglasses or braces for your children. You also don’t have to pay tax on the interest or other earnings on amounts in the account when the funds are spent on qualified medical costs. Funds from the HSA that are used for ineligible medical expenses, however, will be taxed and may be subject to a significant tax penalty.
Find the HSA that is suited for you
When comparing different HSAs, review the account disclosures for fee information, the interest rate expressed as the Annual Percentage Yield (APY), and other important terms and conditions. Comparison shopping for the best terms and rates can make a significant difference in the amount of funds available to you for your medical expenses. Many HSAs charge monthly maintenance fees, paper statement fees, outbound transfer fees, and account closure fees which can exceed the interest earned on the account.
Also, consider how convenient it will be to add money to your HSA and to make payments from your HSA. If you’re considering moving an existing HSA to another bank, first check with your health insurance company to make sure it will permit the switch. Also be aware that HSAs may impose “exit” fees, including outbound transfer fees and account closure fees, if you move your account and be sure to ask about delays on the availability of funds when transferring.
Understand your deposit insurance coverage
To verify that your HSA is held at an FDIC-insured institution, first make sure you know the name of the bank where the funds are to be held. You then can use FDIC BankFind to see if the institution is FDIC-insured. If your insurer set up the HSA for you and you do not remember receiving the name of the institution, you may need to contact your insurer to find out where the funds are held. As for your FDIC deposit insurance coverage, if you have not named beneficiaries then your HSA is insured as a single account and, together with any other single accounts you own at the same bank, is eligible for up to $250,000 in coverage if the institution fails. If you do name beneficiaries, then your HSA is insured together with any of your other “trust accounts” at the same bank (i.e., deposits with beneficiaries) for up to $250,000 per eligible beneficiary, with a maximum limit of $1,250,000 per owner if five or more beneficiaries are named. For more information regarding FDIC deposit insurance coverage, call 1-877-ASK-FDIC.
Be aware of any investment risks
Your HSA provider may allow you to transfer some of your savings from an FDIC-insured deposit account to a non-deposit investment product. Non-deposit investment products, such as one or more mutual funds, are not FDIC-insured. Before considering whether to invest some of your HSA money in the market, consider whether you have enough in your FDIC-insured HSA deposit account to cover unplanned medical expenses that you may be responsible for next year, in case the investments lose value.
Regularly monitor your account activity
You should review your account statements immediately after they are issued to limit your lost funds in the event of fraud or an error. Some HSAs may require you to either review your statement online or pay an additional fee to receive paper statements in the mail.
HSA debit cards
Unless you expect to use your HSA debit card for a medical expense, consider keeping it at home in a safe place and separate from your other debit and credit cards. This will reduce the risk of using it for non-medical purchases and inadvertently incurring a tax penalty. You may also want to tape a note to the front of the card as a reminder that it should not be used for everyday expenses. If your debit card is lost or stolen, contact your bank as soon as possible.
Knowing the rules and uses of an HSA can have savings and potential tax advantages, but it is important to know the costs associated with the account as well.
Additional Resources:
Consumer Financial Protection Bureau (CFPB), Issue Spotlight: Health Savings Accounts
Department of Health & Human Services, Protect yourself from Marketplace fraud & scams
Institute of Museum and Library Services, Information Literacy
For more consumer resources, visit FDIC.gov, or go to the FDIC Knowledge Center. You can also call the FDIC toll-free at 1-877-ASK-FDIC (1-877-275-3342). Please send your story ideas or comments to ConsumerEducation@fdic.gov. You can subscribe to this and other free FDIC publications to keep informed!