A health savings account (HSA) is a tax-deferred savings account that allows you to spend tax-free dollars on out-of-pocket medical, plus dental and vision. When paired with a high deductible health plan (HDHP), an HSA can lower your taxable income, lower your MAGI (qualifying you for more cost assistance), and as a result, turn low-premium high-deductible plans into the most valuable plans around.

Below we discuss tips and tricks for funding an HSA, pairing it with the right plan, and using it to take advantage of cost assistance under the Affordable Care Act.

How Does an HSA Work?

In simple terms, a Health Savings Account (HSA) pairs with a high-deductible health plan and allows you to spend tax-free dollars on care while lowering your taxable income. Here is a quick overview of how an HSA works:

  • Every year you can fund your HSA up to the maximum amount (or less).
  • You can deduct the amount you fund your HSA by from your Adjusted Gross Income (AGI). This lowers your taxable income and MAGI.
  • By lowering your MAGI, you can qualify for more cost assistance through the Affordable Care Act’s Health Insurance Marketplace (ObamaCare).
  • Funding limits are monthly, so if you start late in the year, you can’t fund the full amount.
  • If you fund an FSA or Archer MSA, you can’t fund an HSA for the full amount in the same year.
  • You don’t lose your HSA funds unless you withdraw them, use them for care, or roll them over into an investment account.

HSA Funding Limits (Annual Contribution Limits for Health Savings Accounts)

HSA limits can change slightly each year, but for 2015 they are $3,350 for an individual and $6,650 for a family. Those 55 and older can contribute an extra $1,000, which is $4,350 for an individual and $7,650 for a family.

Minimum
Deductible
Maximum
Out-of-Pocket
Contribution Limit
55+ Contribution
Single
$1,300
$6,450
$3,350
$1,000
Family
$2,600
$12,900
$6,650
$1,000

High deductible health plan. For calendar year 2015, a “high deductible health plan” is defined under § 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,450 for self-only coverage or $12,900 for family coverage. IRS

hsa-tax-v-not-taxed

Tax Benefits of an HSA (Including Tips for Gaining More Cost Assistance)

The real reason to use an HSA is tax benefits. See the chart above. An HSA is one of the only “investment vehicles” that allows you to completely bypass paying taxes. This is only true when you spend the money on approved medical expenses, and the amount you invest is limited by annual funding limits. That being said, any money that you would spend on care anyway should be invested in an HSA when possible. We will break it down below, but for many Americans in the 100% – 400% of the Federal Poverty Level, an HSA will work wonders by lowering your taxable income, qualifying you for more cost assistance, and helping you to avoid ever having to be taxed on that amount.

Look at the table below. Notice how if you make $37,500 in household income as a single filer, investing $3,350 in an HSA would actually drop your tax rate by 10%. Heck, even investing $100 at the end of December would do the trick! Now think in terms of ObamaCare (the ACA). By dropping your income from say $32,000 to $29,000, you would be under 250% of the Federal Poverty Level and would qualify for more tax credits and out-of-pocket assistance on a Silver Marketplace plan. This would not have been true without the HSA. Remember, HSA’s only work with high-deductible health plans. You’re welcome internet.

Table 1. 2015 Taxable Income Brackets and Rates
Rate Single Filers Married Joint Filers Head of Household Filers

10%

$0 to $9,225 $0 to $18,450 $0 to $13,150

15%

$9,225 to $37,450 $18,450 to $74,900 $13,150 to $50,200

25%

$37,450 to $90,750 $74,900 to $151,200 $50,200 to $129,600

28%

$90,750 to $189,300 $151,200 to $230,450 $129,600 to $209,850

33%

$189,300 to $411,500 $230,450 to $411,500 $209,850 to $411,500

35%

$411,500 to $413,200 $411,500 to $464,850 $411,500 to $439,000

39.6%

$413,200+ $464,850+ $439,000+

IRS HSA Forms

In order to get the tax advantages of an HSA, you’ll need to file the correct forms at the end of the year. You can see all the latest HSA forms from the IRS here including the following:

No Use it Or Lose it With an HSA

With an HSA, there is no use-it-or-lose-it rule. You can fund your HSA up to the maximum each year and then roll any money you don’t use into a retirement account when you turn 65. You can even withdraw HSA funds for non-qualified expenses at a penalty (like with a 401k).

Use an HSA to Invest

You can use your HSA as an investment vehicle. You build up money tax-deferred. Whatever money you don’t spend on care can be withdrawn or rolled into a IRA. This allows one to be taxed less at higher tax rates (while they are younger and claiming more income) and then to use tax-free dollars on care (the money was going to come form somewhere, typically after-tax dollars with no tax advantage… unless medical deductions over 10% were claimed that year). Whatever isn’t used on care or withdrawn early (at a penalty that may be less than a persons tax rate at the time of making the money) can be rolled into an IRA and invested.

How to Get an HSA?

You can get an HSA through any bank (including HSABank.com). Just ask a broker or your bank, or do a quick google search for HSA.

What is Better a High-End Plan or High Deductible Health Plan With an HSA?

You’ll almost always get better value with a high-deductible health plan and HSA than you would if you bought a high-end plan with a high premium. That seems strange, but we have done the math over and over. If you make between 100% – 400% of the Federal Poverty Level, don’t have a ton of medical needs, and don’t live paycheck to paycheck, go with the high deductible and HSA (we suggest a Marketplace Silver plan as it’s the only pay that you can get out-of-pocket cost assistance on).

When Not to Get an HSA

Those who have a lot of medical needs up-front and don’t qualify for cost assistance have a little more number crunching to do. In some cases, a high-premium, low-deductible plan with a low out-of-pocket maximum is going to be the best. Sometimes the benefits and networks can be better on higher-premium plans. Sometimes it’s not as much about savings as it is about quality care and not paying as much out of pocket (even with tax-free dollars). In these cases, one may want to look at non-HSA eligible plans. You never lose the money in your HSA, so feel free to switch between eligible and non-eligible plans annually.

Why Do HSA’s Offer So Many Benefits?

You may be wondering at this point, “why do HSA’s offer so many benefits, isn’t there a catch?” Why yes, there is a catch. The catch is that, due to our healthcare spending rising faster than our GDP, the country is in a “healthcare crisis.” By using an HSA, you take a burden off your insurer (you pay out-of-pocket for a lot of care instead of them), you take a burden off the system (you shop around for care and invest in the economy through your HSA), you pay your taxes (HSA’s require you to file taxes), and you have health insurance (having health insurance means you don’t burden the system by racking up un-payable bills). In other words, America uses HSA’s to help you help yourself, and typically the IRS offers some sort of reward for investing in yourself and the economy. There is perhaps no better reward than the HSA.