Health savings accounts (HSAs) are powerful vehicles for helping consumers pay for healthcare expenses—in large part because of their associated triple tax benefit. Money is deposited pre-tax, can grow tax-free, and can be withdrawn tax-free to pay for qualifying healthcare expenses. Yet, despite these significant benefits, experts say HSAs are consistently underused.
This underuse is understandable because of overdone jargon that’s lost its meaning, says Ann Brisk, Senior Vice President at HSA Bank. “We say the same things over and over: triple tax advantage. But after saying those things so often, I don’t think they mean anything anymore.”
Health saving accounts can protect people’s health and financial security. However, extending their benefits to more people requires rethinking how we talk about them. That’s why we sat down with Brisk to take a deep dive into the HSA pros (and cons) that consumers can understand.
We encourage employers to download the PDF of this list and use it to help more employees understand the benefits of an HSA.
HSAs are paired with lower-premium plans
To open an HSA, you must have a type of health insurance called a high-deductible healthcare plan. As the name suggests, these plans come with a higher deductible before your insurance kicks in; but the flip side is that they also come with lower premiums. The majority of employees pay for more coverage than they need, missing out on up to $1,700 annually, according to the TIAA Institute. When you overpay on premiums, you never see that money again. But with a high deductible plan, you can pay less in premiums and then contribute that money to a health savings account where it grows tax-free.
HSAs are always yours
HSAs are a personal savings account that you can use forever. Everything you contribute rolls over every year, whether you spend it or not, and you can take it with you if you change jobs or health plans. If you withdraw money for a qualifying medical expense, it is completely tax-free. Health savings accounts are best used for medical expenses, but it’s important to note that, should you need to, you can use it for other expenses—you’ll just have to pay taxes on it.
HSAs are a safety net that never goes to waste
If you regularly contribute even a small amount to your HSA, it will start to add up. You’ll likely have years when you don’t use it, and that money will just continue to grow year over year, tax-free. Then, when the inevitable expensive year (or years) happen, you’ll have a safety net of funds set aside to pay for medical expenses—and you won’t pay any taxes on the money you withdraw.
“There’s no other health savings vehicle like them,” says Brisk. “When you have that rough year, you have a security cushion. I’ve had that experience personally and my HSA was a game-changer. So, start adding in money, just like you do for a 401K or retirement, and know that money will never go to waste.”
They’re good for every stage of life
Whether you’re new to the workforce or closer to retirement, HSAs can support your health and financial security. Consider these three examples:
- First job: when you’re early in your career, you often have less health risks. This is an ideal time to take a lower premium plan, start contributing small amounts to your HSA, and gain whatever money your employer matches. You likely won’t need to dip into your account, so that money will grow quickly during those early years.
- Mid-career: Your health needs may increase, especially if you’ve started a family. This is when the HSA is your security cushion—continue to contribute to it, especially during good years, and tap into it when you have a tough year.
- Pre-retirement: Along with time to relax, retirement also means increased health costs. You’ll save a lot of money by paying with tax-free HSA withdrawals, so contribute to your HSA as much as possible in the years leading up to retirement.
Getting started can be overwhelming
Just like with 401K contributions, early HSA contributions can feel a little futile. You might be tempted to put your money toward something that feels more immediate, like that fun vacation you’ve been dreaming about. Remember though, even small contributions can add up over time, and when you inevitably need to pay for bigger healthcare expenses, you’ll be glad to have a safety net.
Aversion to a high deductible
Opening an HSA requires opting into a high deductible plan. Along with lower monthly payments, there’s also the potential of facing higher medical bills before your deductible kicks in. That’s why it’s always important to consider your specific health needs when choosing your health plan.
But while high deductible plans aren’t the right fit for everyone, avoiding them without careful consideration often means overbuying health insurance. When considering a high deductible plan, ask yourself the following questions:
- Given my health needs, how long will it take me to hit my deductible? Is that timing a lot different than my other plan offerings?
- How much money will I save annually on premiums?
- How much money will I earn through employer HSA contributions? (Remember, you can use that money to cover unexpected costs.)
“More often than not, these plans can help people save, but people need help doing the math to find that out,” says Brisk. “With a school district client, our decision support partner, MyHealthMath, saved employees over $2,000 a year just by crunching the numbers and helping them realize when an HSA-eligible plan was the right fit. Instead of throwing money away on premiums, capture those savings and then put them in your HSA—something you can take with you wherever you go.”
Looking for more information on HSA pros and cons? This recent article shares strategies for getting started with an HSA.