What is an HSA? | WYPR

What is an HSA?

Oct 5, 2020

It’s the time of year when most companies have benefits enrollment, when you can sign up for or make changes to things such as your health insurance. Amid the pandemic, it’s more important than ever to know about your options and choose wisely. One option that many people have in their benefits package is a Health Savings Account, or HSA.

Today, Catherine Collinson, president of nonprofit Transamerica Institute is here to explain HSAs. Catherine, can you give a bit of background as to what an HSA is?

Catherine Collinson:

An HSA or Health Savings Account is a tax-advantaged medical savings account available to taxpayers who are enrolled in a High-Deductible Health Plan. You may ask what a High-Deductible Health Plan is. It is a health insurance plan with a higher deductible than a traditional insurance plan, meaning you pay more health care costs yourself before the insurance company starts to pay its share.

Al Waller:

To be clear, someone needs to be enrolled in a health insurance plan that has a higher deductible in order to be able to enroll in an HSA. So, now, can you give us more perspective and details about HSAs?

Catherine Collinson:

HSAs are an excellent way to save for medical expenses and to reduce to your taxable income. The funds contributed to the account aren’t subject to federal income tax at the time of deposit, the funds grow tax-deferred, and are not taxable when they are withdrawn to pay for medical expenses. HOWEVER, the funds must be used to pay for qualified medical expenses, such as the higher deductibles we talked about, as well as copayments, coinsurance, medications, and other health-related expenses.

Al Waller:

The tax advantages are quite significant. Are there any other important considerations when to contributing to an HSA?

Catherine Collinson:

Yes. Once you set money aside in an HSA, there is a steep penalty if using the funds for anything other than qualified medical expenses. Withdrawals are subject to regular income tax and a whopping 20 percent penalty, if taken out for non-medical reasons. There is also a limit to the amount you can contribute in any given year. For 2020, it’s $3,500 if you just cover yourself on your health plan and up to $7,500 for family coverage, and will be going up slightly in 2021.

Al Waller:

Do HSAs require that you spend down the funds every year? Use it or lose it?

Catherine Collinson:

That’s a great question and the answer is “no.” An HSA builds year over year, even if you don’t spend it. So you can build up reserves to pay for health care items and services you need later – even into retirement.

Al Waller:

Thank you for this detailed information. I hope it will help people as they make their benefits elections this fall. That’s all we have time for here on ClearPath – Your Roadmap to Health and Wealth on WYPR, your NPR news station. Stay safe.