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Whoa, what is an HSA?!  It’s benefit election season and everyone around here is going nuts.  We have  added an option of a High Deductible Health Plan  (HDHP) with a Health Savings Account (HSA).  

Cue all out frenzy!  High Deductibles! That’s the last thing we want.

How do High Deductable Health Plans Work?

In 2018, the government allows HDHP’s deductibles  to range from $1350 to $6750 for individuals and $2700 to $13,500 for families.

So deductibles will vary widely with your offered plan.  Still, it’s not all that bad.  

The theory with HDHP’s are that you bear more of the upfront cost (deductible) but pay lower premiums. To lessen the blow of the deductible, the government allows you to invest in a Health Savings Account.  So, you can save up the money you will need for those high deductibles in an HSA pre-tax.  My employer even contributes money to the HSA for us.

First, some definitions. 

The deductible is what the insurance company expects you to pay before they start pitching in.  Premiums are what you pay monthly so you can have insurance.  A Co-pay is what you pay out of pocket when you go to the doctor’s.  Finally, Co-insurance is what you will pay for the billed charges even after your deductible is met (because you’re not paying enough obviously- eye roll).

How do HSA Accounts Work?

The HSA is all the rage in the FIRE community- because it is a triple tax threat.  You put pre-tax dollars into account as paycheck withholding. The money in the account can be invested in the stock market (I’ve put mine 100% in the Vanguard S&P 500 index fund).  The money grows tax free. And you don’t have to pay taxes when you take money out, as long as it is for a reimbursable health expense. On top of that, it lowers your overall taxable income!

How an HSA can be a Retirement Account

Since the FIRE community lives small and has a large cash cushion, they cash flow the deductible and save the receipts for their health expenses.  Those receipts can be turned in any time to take money out of the HSA (which can be useful in early retirement). Key to this is that if you don’t use your HSA money, it rolls over to the next year, UNLIKE the FSA (Flexible Spending Account).  The money in an FSA gets forfeited at the end of the year (except $500). 

If there is money in the HSA when you turn 65, it basically turns into a retirement account (IRA). Prior to age 65, there is a 20% penalty for withdrawing the funds for non health expenses. 

There is no penalty after age 65.

HSA vs FSA: Which is Better?

A lot of people hear HSA and think FSA (Flexible Spending Account).  FSA’s have gotten a bad rap. Mostly because if you don’t use the money in your Flexible Spending Account, it gets forfeited.  Money in an FSA usually can’t be invested… it doesn’t earn you significant interest.

So, an FSA is only a good investment if you know for sure you are going to use all that money.  Unlike an HSA, you can participate in an FSA with a regular insurance plan like an HMO or a PPO (you don’t need a high deductible plan).

HSA and FSA at the same time

Personally, I fund both a dependent care FSA and a HSA. As discussed here, my family uses the dependent care FSA for daycare expenses.  We will definitely use all of it up by the end of the year since the max is $5000 and we spend >$20,000/yr on daycare.   You can have a limited purpose FSA with an HSA.  But, you can’t have an HSA and a health/medical FSA at the same time. 

When Do High Deductible Health Plans and HSA’s Work?

HSA’s and HDHP’s can be very good in two scenarios:

  1.  If you are generally healthy and don’t have many medical expenses.  With barely any health care expenses, you can take the money in your HSA and keep it for next year or for retirement.  

  2. Or, if you have a chronic illness, you will meet your deductible early in the year and have cash available.  Once you meet your deductible, the rest of the year is fully covered (except co-pays and coinsurance- that depends on your plan). For example, my husband’s medication for Crohn’s disease, Humira, costs $10,000 per month.  So we would meet the deductible in January/February and then be fully covered for the rest of the year. 

FSA vs HSA Comparison Chart

Below is a head to head comparison of medical FSA’s and HSA’s.

FSAHSA2019 Maximum Contribution$2700/individualIndividual $3500/ Family $7000Rollover if not used$500 onlyFull amount in HSAMust be in HDHPNoYesCan be investedNoYes  (after cash threshold met)

Other Resources: A lot of people are talking about HSA’s right now.

Related Posts:

Tell us about your experiences with FSA and HSA accounts in the comments below!

Standard Disclaimer: Not meant to be individualized financial advice.  For entertainment purposes only.  Consult your tax professionals before making major money decisions.


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