Tax Facts: Shopping for an HDHP in the health care marketplace

Is it possible to set up a health savings account (HSA) and save tax-free money to pay your future medical bills, even if your job doesn't offer health insurance benefits? Yes! You can purchase an HSA-qualified high-deductible health plan (HDHP) in the individual market, which is where people buy coverage if they don't have access to an employer-sponsored plan or a government plan like Medicare or Medicaid.

There are a few counties where HDHPs aren't available in the individual market, but that's exceedingly rare. For today, we'll be talking about the vast majority of the country, where HDHPs can be purchased by an individual shopping for health insurance.

How do you shop for your own health insurance?

If you're buying your own health insurance, you can either shop in the Patient Protection and Affordable Care Act (ACA) created health insurance exchange — also known as the marketplace — in your state, or you can buy a plan "off-exchange" which just means that you're buying it directly from the insurance company (note that there's no option to buy off-exchange plans in the District of Columbia; all individual market plans there are sold through the exchange).

Regardless of whether you're using the exchange or buying off-exchange, you can have a health insurance broker help you with the process if you prefer, and there are other enrollment assistants who can help you with the process of purchasing coverage in the exchange.

In 39 states, the health insurance exchange is DC and the other 11 states operate their own health insurance exchanges, but you can get to them by starting at

When you select your state or enter your ZIP code, if you're in a state that runs its own exchange you'll see a notice directing you to your state's exchange, and clicking on the notification will take you to the correct website. So you can't go wrong by starting at

But be aware that there are lots of private websites that could easily be mistaken for the official exchange. Some of them are web brokers that work with the official exchange and can get you enrolled in an exchange plan. But others are selling plans that aren't regulated by the ACA.

All currently-available HDHPs must be compliant with the ACA, regardless of whether they're sold through the exchange or not, so non-ACA-compliant plans, like short-term health insurance, won't help you in your quest to get a plan that's HSA-qualified. If in doubt, starting with is a good way to know for sure that you're in the right place if you want to buy a plan through the exchange.

If you want to buy a plan outside the exchange, you can do that by contacting a reputable broker who can show you all of your options, or by directly contacting the various insurers that offer individual health insurance coverage in your area (the insurance department in your state can provide you with details about which insurers offer plans).

How do you find an HDHP?

If you're working with an insurance broker, you can just tell them that you want an HDHP and they'll narrow down your options so that the only plans they show you are HDHPs. Then they can help you compare premiums, out-of-pocket costs, provider networks, and formularies (covered drug lists) to figure out which one would work the best for you.

If you're shopping on your own, and most of the state-run exchange sites have an option that will let you filter the plans so that you're only shown HDHPs

(On, you do this by clicking on "refine results" after you see your plan options. Then you'll be able to select "health savings account eligible." Once you apply that filter, the non-HDHPs will be removed from the plans choices that you see.)

HSA-qualified plans generally have the term "HSA" somewhere in their name or near the top of the plan details, but you might have to search to find it. If in doubt, you can call the insurance company to verify that the plan you're considering is indeed HSA-qualified. Keep in mind that there are specific rules for HSA-qualified HDHPs — it goes beyond just having a high deductible.

Stay tuned next week, when we'll take a look at how you can decide whether you should buy your HDHP through the exchange or off-exchange.

Once you're enrolled...

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Tax Facts is a weekly column offering straight up, no-nonsense HSA tax tips, written in everyday language. Look for it every Tuesday, exclusively on the Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.


Tax Facts: Can you have more than one HSA?

This is a very common question from our customers, so let's lead with the short answer: Yes, you can have more than one health savings account (HSA). But it's important to understand the pros and cons of having multiple accounts, to make sure that you stay in compliance with IRS rules.

HSAs cannot be jointly owned

If two spouses have coverage under one HSA-qualified high deductible health plan (HDHP) and meet the rest of the IRS requirements for HSA eligibility, they can establish an HSA in one partner's name and contribute up to the family maximum amount to that spouse's HSA.

A person with individual HDHP coverage can contribute up to $3,450 in 2018 to their HSA, and a person with family HDHP coverage can contribute up to $6,900. These amounts will be raised to $3,500 and $7,000 in 2019.

But they also have the option for each spouse to establish their own HSA, and split up the family maximum contribution how they prefer. The IRS notes that the default is to split the contribution limit equally between the two spouses, "unless you agree on a different division."

In this case, each spouse would have their own HSA, but the funds in each HSA could be used for any eligible family members. From a practical standpoint, the family has multiple HSAs, even though each one is technically owned by a single person.

But what if you're single?

Could you have more than one HSA? Again, the answer is "yes." And the family we just considered could have more than two HSAs, if one or both spouses opted to have multiple HSAs.

As long as you have an HSA-eligible health plan, there's no limit on how many HSAs you can have. As far as the IRS is concerned, the only limit is how much money you can contribute to your HSAs each year. You can contribute it all to one HSA, or spread it out across two or more accounts.

Maybe you just want to use more than one brokerage firm or bank. Maybe your employer will contribute some money to your HSA that's established with your employer's preferred HSA administrator, but you'd also like to contribute to an account with one you choose -- maybe one that offers different investment options.

Maybe you have an HSA from a previous employer and you're happy with the HSA administrator, but your new employer offers an HSA from a different one, and you want to maintain both accounts.

A few things to keep in mind...

You can't contribute more than the maximum amount the IRS allows for a given year, regardless of how many HSAs you have. And contributions made by anyone else, including your employer, count towards your total limit.

If you and your spouse both have family HDHP coverage, the family limit applies to your combined contributions. Please note that if you have an adult child who is on your HDHP but not considered a tax dependent, they can contribute to their own HSA (and are not eligible as a dependent under your family HSA as they must be a qualified tax dependent), but it doesn't count against the total family contributions you can make, since they file their own tax returns.

If you have an HSA through your employer, you might to be able to avoid income taxes and payroll taxes on any contributions you and/or your employer make to that HSA by contributing pre-tax from pay. If you choose to have another HSA with a different HSA administrator and make your own contributions to it (outside of your employer's payroll system), you'll be able to deduct those contributions on your tax return. When you do that, you'll avoid income tax on the contributions, but you can't avoid payroll tax.

Keeping careful records is a must if you're using an HSA, since the responsibility is on you to prove everything was done correctly if you're ever audited. And if you're using multiple HSAs, the need for careful record keeping is especially important.

You'll need to make sure that you have receipts for the total amount that you're withdrawing from your HSAs, and ensure that there's no double dipping: If you reimburse yourself for a medical expense using one HSA, you can't then reimburse yourself for the same expense from a separate account.

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Tax Facts is a weekly column offering straight up, no-nonsense HSA tax tips, written in everyday language. Look for it every Tuesday, exclusively on the Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.


Tax Facts: What happens to HSA contributions when you drop your HDHP?

Last week we looked at how HSA contribution limits work if you enroll in an HSA-qualified HDHP mid-year. But what if you drop your HDHP coverage mid-year? Or what if you get married, divorced, or otherwise change your HDHP coverage, in the middle of the year? Don't worry — the IRS has rules for all those situations, too.

If you drop your HDHP coverage mid-year...

...or become ineligible to contribute to an HSA for any other reason, the short answer is you have to stop contributing to your HSA at that point.

Your contribution limit for the year will be prorated based on the number of months that you were eligible to make HSA contributions. There are a couple of points to keep in mind here:

As long as you have HDHP coverage and are otherwise HSA-eligible on the first day of a calendar month, you're considered HSA-eligible for that whole month. So, if you had an HDHP from the first of the year through August 15, you're allowed to contribute 2/3 of the total annual contribution limit, since you're considered HSA-eligible for all of August.

Also, you don't have to actually make the HSA contributions during the months you had HDHP coverage. You have until your tax return is due (typically April 15 of the following year) to make some or all of your HSA contribution. The current full-year contribution limit for a someone participating in the HDHP as a single individual under age 55 is $3,500.

What if your HDHP status changes?

The HSA contribution limits are higher if you have family HDHP coverage: $7,000 in 2019. But the switch between self-only coverage and family coverage rarely corresponds to your New Year's bash.

So how does the HSA contribution limit work if you add a family member to your HDHP mid-year? The last-month rule — with a testing period — that we described last week would apply in this situation, or you can use the prorated method of calculating the contribution limit.

A few examples...

Let's say you have self-only HDHP coverage from January through September 2018, and then you have a baby in October and add your little one to your HDHP. So for October, November, and December, you have family HDHP coverage.

To show you what we mean, let's crunch a few numbers. You have two options for calculating your HSA contribution limit:

  • Prorated contribution limit: Based on the $3,500/$7,000 annual contribution limits, 9 out of 12 months of self-only coverage would be $2,625. And 3 of 12 as a family is $1,750. Adding those together, you get $4,375.
  • Using the last-month rule, you get to make the full contribution based on whichever type of HDHP coverage you had on December 1. In this case, it's family HDHP coverage, which means you get to contribute $7,000 to your HSA for 2019.
  • Keep in mind -- then you have to maintain HDHP coverage throughout all of 2020. If you don't, you'll have to pay income tax and an additional 10% tax on the difference between $4,3750 and $7,000.

Now let's say you have family HDHP coverage from January through May, and then have a life-changing event, and switch to self-only HDHP coverage for the remainder of the year. In this case, you'd just use the prorated method for determining the contribution limit.

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Tax Facts is a weekly column offering straight up, no-nonsense HSA tax tips, written in everyday language. Look for it every Tuesday, exclusively on the Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.

Tax Facts: The deductibility of HSA contributions

If you have HSA-qualified health insurance, you probably already know that you can deposit tax-free money into a health savings account (HSA) to save for future medical expenses or even for retirement. But "tax-free" can mean different things depending on how you make your HSA contributions.

You can contribute to an HSA as long as you have coverage under an HSA-qualified high-deductible health plan (HDHP). And, you can't also have another disqualifying health plan, such as most FSAs and other full-coverage health insurance plans.

Some people make their own contributions directly to an HSA, while others make their contributions via their employers. The employer then uses a salary reduction arrangement to take out pre-tax money from the employee's pay and send it to the HSA on the employee's behalf.

In both cases, there's no federal income tax on the HSA contributions (and in most states, there's no state income tax, either). But some HSA contributions are still subject to payroll taxes. Let's take a look at how it works.

Income tax vs. payroll tax

First, let's get to a very common question: What's the difference between income tax and payroll tax?

Income tax is paid entirely by the employee, and is usually designated on your W-2 as "withholding" or simply "federal tax." And in most states, there's an additional line for state withholding/tax.

Payroll taxes, which fund Social Security, Medicare, and unemployment insurance, are paid partly by the employee and partly by the employer.

If you're self-employed, your self-employment tax refers to Social Security and Medicare taxes, and you essentially pay both the employer and employee portions, in addition to income tax.

Contributions via salary reduction: Avoid both income tax and payroll tax

If you've signed up for an HDHP and HSA through your employer, your employer is likely using a Section 125 plan so you can make salary reductions to cover your HSA contributions before your tax liability is calculated (meaning you end up paying income taxes and payroll taxes on a smaller amount of income).

Some employers also make contributions on their employees' behalf, since HSA contributions can come from the employer and/or the employee (the total amount contributed, including the portion contributed by the employer, can't exceed the annual contribution limits).

In 2019, that's $3,500 if you have HDHP coverage for just yourself, and $7,000 if you have HDHP coverage for yourself and at least one other family member.

Employer contributions to an HSA are not considered income and so they're not subject to income tax or payroll tax. If the employee makes contributions via a Section 125 salary reduction arrangement, those contributions are also considered employer contributions, which means they're not subject to income tax or payroll tax (see the instructions for IRS Form 8889; these contributions show up in Box 12, with Code W).

If your employer is deducting your HSA contributions from your paycheck but does not have a Section 125 plan allowing the contributions to be calculated before taxes, your HSA contributions would be considered income (this is rare, but it can happen).

You can then deduct that amount on your tax return to reduce your income tax, but you would not be able to avoid payroll taxes on the contributions.

Contributions made outside your payroll system: Avoid income tax, but not payroll tax

But what if you buy your HDHP coverage on your own? Or choose to use a bank or brokerage account other than the one your employer uses as an HSA custodian? You can send money to your HSA yourself, rather than using your employer's salary reduction plan (and this is your only option if your employer doesn't offer a means of contributing to an HSA via the payroll system).

You won't have to pay income tax on that money, but you'll still pay Medicare and Social Security taxes on it, and in most cases, unemployment insurance tax.

When you make your own HSA contributions (as opposed to using your employer's salary reduction arrangement) you make the contributions during the year with after-tax money, and then you get to deduct your contributions on your tax return (line 25 on Form 1040), regardless of whether you itemize deductions or take the standard deduction. But that just eliminates the income tax — there's no mechanism for recouping the payroll taxes you paid on that money.

Keep in mind that although avoiding payroll taxes sounds like a win, the current benefit may be partly or entirely offset by smaller Social Security checks once you retire, since the amount you get in Social Security benefits is based on the amount you earned that was subject to Social Security taxes during your working years.

As always, we're here to help you learn the basics but can't offer tax or legal advice. Always speak with a tax adviser if you're curious about how this works for your situation.

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Tax Facts is a weekly column offering straight up, no-nonsense HSA tax tips, written in everyday language. Look for it every Tuesday, exclusively on the Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.


Wage Up! HDHPs and male contraceptive coverage

Health insurance is regulated at both the state and federal level, but HSA rules are federal. Let's take a look at how that plays out when it comes to pre-deductible coverage for male contraception.

HHS regulations from the Affordable Care Act require all non-grandfathered health plans to cover a variety of preventive care at no cost, regardless of whether the deductible has been met. The covered preventive care includes:

And in 2013, the IRS clarified that all preventive care mandated under ACA regulations would be considered preventive care under HDHP rules. That allowed HDHPs to be compliant with the ACA — they cover the required preventive care at no cost to the patient, and also meet the guidelines for HSA-qualified plans.

What if states require additional coverage?

States can impose additional insurance regulations that go beyond the ACA's requirements. Though states can't change the rules that apply to HSA-qualified HDHPs since that's managed by the IRS.

Some states have taken action to address an issue that many consider unfair. Under HHS regulations, all types of FDA-approved contraceptives for women have be covered at no cost to the plan enrollee. But FDA-approved contraceptives for men don't have to be covered.

Vermont, Illinois, Maryland, and Oregon have passed laws requiring all state-regulated health plans to cover FDA-approved male contraception (condoms and vasectomies), regardless of whether the deductible has been met. This could result in significant cost-savings, since vasectomies are much less expensive than tubal ligations, which are required to be covered under federal regulations.

But while these state rules were created with good intentions, they put people with HDHP coverage at risk of losing their ability to contribute to their HSAs. That's because the addition of pre-deductible coverage for male contraception makes the plans incompatible with the rules for HSA compliance.

[Note that if the federal government were to mandate no-cost male contraceptive coverage, the plans would still be considered HSA-compliant.]

To address this, the IRS issued transitional relief in the spring of 2018. The IRS has clarified a few points:

  • Prior to 2020, they'll let people contribute to an HSA if they have a plan that would otherwise be an HDHP, but that covers male contraception as a result of a state mandate.
  • The IRS does not currently consider male contraception to be a preventive care benefit, so in 2020 and beyond, people whose plans cover male contraception pre-deductible would not be eligible to make HSA contributions.
  • But the IRS is considering changing the rules to allow pre-deductible coverage of male contraception on HDHPs (you can submit a comment to the IRS about this by adding "Notice 2018-12" in the subject line).

More states might opt to take action on this issue, adding male contraceptive rules. But for the time being, they'll likely exempt HDHPs from the new rules so that people in those states can continue to contribute to HSAs in 2020 and beyond. Maryland has already enacted additional legislation to exempt HDHPs from the new state law mandating no-cost coverage for male contraception.

It's also possible that the IRS could relax their stance on the issue of male contraception and HDHPs. Stay tuned!

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Whether you're spending steadily or saving for something big, Wage Up! is where we highlight the latest services available to buy with your HSA, every Monday on the HSA Learning Center. And for everything else about your health and financial wellness, be sure to follow us on Facebook and Twitter.


Compound It! The affordable premium perk of HSAs

Does the term "high deductible" scare you? If so, you're not alone. Particularly if you're used to having coverage with a low deductible and copays for things like office visits and prescriptions, the idea of switching to a high deductible health plan (HDHP) might make you understandably anxious.

But having an HDHP lets you save tax-free money in a health savings account to cover future medical bills, and the HDHP itself is a good choice if you want to save money on your monthly health insurance premiums--the amount you pay to be covered by your plan each month.

When you get employer-sponsored coverage

According to the Kaiser Family Foundation, the average single employee who selected a non-HDHP HMO plan in 2017 had to pay about $128/month in premiums via payroll deductions (the employer paid an average of $460/month in additional premiums; most employers pay the majority of their employees' premiums).

But for single employees who selected HDHP coverage, the average employee's premium was about $85/month — a savings of approximately $43 every month.

In both cases, the employees have to pay a lot more if they want to add family members to their plans. But the employee's share of the premiums for family coverage is still cheaper under an HDHP than under the average HMO option. An HDHP averages $383 per month, versus $571 per month under an HMO.

When you buy your own health coverage

If you're buying coverage in the individual market (ie, you don't get it through your employer), you'll likely have numerous options. Nearly every area of the country has at least one HDHP available to people who purchase their own coverage, but there will also be an assortment of other options available.

In the individual market, the HDHP options will be among the lowest-priced options, although there may be some slightly lower-priced non-HDHPs available. Keep in mind, you can't contribute tax-free money to an HSA if you pick a non-HDHP.

This is important for people who might otherwise simply select the lowest-priced plan — don't forget about eligibility to contribute to an HSA when you're picking!

A 40-year-old in Denver who buys her own health insurance in 2018 and doesn't qualify for any premium subsidies would pay $353/month for an HSA-qualified plan with a $5,550 deductible. This is in contrast to $472/month for a plan with a $5,300 deductible, but with copays for things like prescription drugs and primary care visits. Note that both plans are HMOs, but they're offered by two different insurers, along with numerous other plan designs.

Prices and plan options vary considerably from one area to another, but in general, HDHPs will be among the lowest-cost plans.

Lower premiums save you money all year long

In some cases, the more expensive option will be the better choice though you can't make that decision until you look objectively at the numbers. Here are some points to keep in mind:

How much will you save in premiums by picking the HSA-qualified HDHP, versus a plan that isn't HSA-qualified?

In the example above, using national averages, a single employee would save $43/month in premiums by selecting an HDHP instead of a non-HDHP HMO. An employee who needs family coverage would save $188/month. The 40-year-old in Denver who picks the HDHP (as opposed to the copay plan described above) not only becomes eligible to save tax-free money with an HSA, she also saves $119/month in premiums.

How often do you typically use the sort of medical services that would be covered with a copay on the non-HDHP options available to you?

If you only go to the doctor twice a year, is having copays worth the extra money you'll pay in premiums every month? (keep in mind that in almost all cases preventive care is covered in full, before the deductible, regardless of whether you choose an HDHP or a non-HDHP).

Do you think you'll reach the out-of-pocket maximum by the end of the year?

If you're anticipating significant medical costs, you might end up hitting the maximum out-of-pocket no matter which plan you choose. You may find that the various plans available to you have similar out-of-pocket maximums. So even though HDHPs are often touted as being a better option for young, healthy people, they can be a good option for people with significant medical needs, too.

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Compound It! is your weekly update of achievable, effective, no-nonsense HSA saving and investment advice, delivered by people who make it work in their own lives. For the latest info about your health and financial wellness, be sure to check out the HSA Learning Center, and follow us on Facebook and Twitter.

Tax Facts: Your 2019 mid-year HSA check-in

It's the middle of 2019, believe it or not, which means it's time to check in on your HSA goals, progress, and future planning.

Are you hitting your contribution goals?

If you have coverage for just yourself under an HSA-qualified high deductible health plan (HDHP), you can contribute up to $3,500 to your HSA in 2019, including contributions that an employer or anyone else makes on your behalf. If your HDHP also covers at least one other family member, you can contribute up to $7,000.

Your ability to contribute to your HSA obviously depends on your financial situation, but contributing as much as you can, up to the maximum allowed, is usually a good idea:

  • HSA contributions are pre-tax (either via a pre-tax payroll deduction or deducted on your income tax return)
  • Any growth in the account (interest or investment growth) is tax-free.
  • Withdrawals are tax-free as long as you use the money for qualified medical expenses. This includes your deductible and out-of-pocket costs under your HDHP, but also things that aren't covered by your HDHP such as dental and vision care, HSA-qualified products, long-term care, etc. And even if you later switch to a non-HDHP health plan, you can continue to use the remaining funds in your HSA, tax-free, to cover your out-of-pocket medical expenses.

Unlike FSA contributions, your HSA contribution amounts are not set in stone for the year. You can stop, start, or change them at any point. You can opt to send one lump sum to your HSA, or spread out your contributions throughout the year. So if you haven't been contributing as much as you wanted to, you have the option to bump up your contributions at this point.

You're responsible for making sure that you don't exceed the allowable contribution limit, so if you're automatically contributing a certain amount of money to your HSA via payroll deduction or periodic bank drafts, now's a good time to double check to make sure that your current track isn't going to result in excess contributions by the time the year ends.

Are your withdrawals aligned with your long-term financial goals?

If you're like most people with HSAs, the majority of your contributions end up getting withdrawn each year to pay for medical expenses. There's nothing wrong with this approach to managing your HSA — it's allowing you to use pre-tax money to pay your medical bills, which is certainly better than having to pay them with money that's already been taxed.

But sometimes people simply aren't aware of the other options available to them. This includes the fact that HSA funds can be invested in the stock market as part of your long-term financial plan, as well as the fact that you can cash-flow your current medical expenses — while letting your HSA funds grow long-term — and reimburse yourself from your HSA years or decades in the future (make sure you're saving all of your receipts and keeping careful track of your medical expenses!).

Your mid-year HSA check-in is a good time to familiarize yourself with the flexibility that HSAs offer. Depending on your circumstances, you might decide to bump up your HSA contributions for the rest of the year, and/or opt to let your HSA money continue to grow for now, with a plan to reimburse yourself sometime in the future.

There's no right or wrong answer here, since it depends so much on your unique situation. But the more you understand about HSAs, the better you'll be able to utilize yours.

Are you keeping careful records?

Regardless of whether you're using your HSA to pay medical expenses as they arise or waiting to pay yourself back at some point in the future, the onus is on you to keep track of all your medical expenses. If the IRS ever questions your HSA withdrawals, you'll need to be able to show them receipts.

And, as is the case with any financial data, this process will be much easier if you're systematic and organized with it. In other words, don't just haphazardly stash receipts in a dusty shoebox under your bed!

Future planning

Even though it's only the middle of 2019, employers and insurance regulators are well into their planning for 2020 and beyond. Here are a few points to keep in mind as you plan for the future:

  • If your HSA is established through your job, is your employer contributing any money to your account? This could be a potential point for negotiating your compensation.
  • Keep an eye out for future federal regulations that could expand access to HSAs. President Trump signed an executive order in June 2018 that directs the Department of the Treasury to "issue guidance to expand the ability of patients to select high-deductible health plans that can be used alongside a health savings account, and that cover low-cost preventive care, before the deductible, for medical care that helps maintain health status for individuals with chronic conditions." (this could potentially open the door for an expansion of what preventive care can be provided pre-deductible on an HDHP).

    The executive order also directs the Department of the Treasury to propose regulations that would update Title 26, Section 213(d) — which outlines what counts as a qualified medical expense — to include expenses for things like direct primary care arrangements and health care sharing ministry plans. Depending on how this is done, it could have significant changes for HSA utilization.
  • If you're already starting to plan for next year, keep in mind that the contribution limits for HSAs will increase again. In 2020, you'll be able to contribute $3,550 to your HSA if you have self-only HDHP coverage, and up to $7,100 if your HDHP also covers another family member.

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Tax Facts is a column offering straight up, no-nonsense HSA tax and financial tips, written in everyday language. Look for it on Tuesdays, exclusively on the Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.


Compound It! Cash? Insurance? How about your HSA?

Has your dental or medical office ever offered you a discount for paying cash for treatment? If so, that might make you wonder whether you'd get a better deal if you skipped your health insurance and just paid cash for some of the care you need. Let's take a look at what you need to know about this, and how your HSA can fit into whatever strategy you decide to use.

If a cash discount is available, you're free to take advantage of it. And you can use money from your HSA to pay the bill. You must have coverage under an HSA-qualified high-deductible health plan (HDHP) in order to make contributions to your HSA.

But tax-free withdrawals from the HSA can be made to cover your out-of-pocket costs for any qualified medical expense, regardless of whether a claim is filed with your insurance or what sort of insurance (if any) you have at that point.

That means your HSA funds can be used to pay for things that aren't covered at all under your HDHP, such as dental care, infertility treatment, LASIK, etc. (your HDHP may or may not cover things like this, but either way, your out-of-pocket costs for them can be paid with HSA funds). As is always the case, you can choose to use your HSA funds immediately, or reimburse yourself years or decades later.

When to use cash instead of other forms of payment

If the medical service you're receiving is not covered at all by your HDHP and your doctor, dentist, chiropractor, etc. offers a cash discount, paying cash to get the discount is probably a wise plan, if you can swing it from a savings or cash-flow perspective.

Keep in mind that when the office says "cash payment," they might literally mean you have to show up with cash in hand, not just an immediate payment in the form of a check or debit card (including a card that's linked to your HSA). Find out in advance what it takes to get the cash discount — you don't want to show up with your HSA debit card and find out that you won't get the cash discount if you use it.

But what if the service is covered by your HDHP? This is where it gets a little complicated, and there are several things to keep in mind:

"Covered" means that the health plan will pay some or all of the expense, assuming you had already met your deductible, copays, and coinsurance). But if you have an HDHP, you already know that you need to pay a sizable chunk of money for your deductible before your health plan starts to pay your medical bills.

If you have to pay a bill yourself but it counts towards your deductible, that's considered a "covered" expense. And assuming that you opt to have a claim filed with your insurance, you're going to have to pay whatever rate your insurer and medical provider have negotiated — without any sort of additional discount — even if you pay with cash.

When we refer to non-covered expenses, we're talking about things your health plan wouldn't pay for even after you meet your deductible. Depending on the plan, this can include things like out-of-network care, dental/vision care, cosmetic procedures (which you can't use your HSA for either), etc.

If your HDHP provides coverage for out-of-network care, you can get the cash discount and still submit the claim to your insurance company. Out-of-network providers don't have any contractual arrangement with your insurer, which means there's no negotiated rate. And since it's common for patients to have to submit their own out-of-network bills and wait for reimbursement, this works well with cash-pay scenarios.

Keep this in mind...

You can only use HSA funds for medical expenses that aren't reimbursed by any other entity. So if you see an out-of-network provider, pay cash, and then submit the receipt to your HDHP for out-of-network claims processing, pay attention to the details. If you haven't met your out-of-network deductible and the entire amount is going to be an out-of-pocket cost even after the insurance company processes the claim, you're free to reimburse yourself from your HSA.

But if you've already met your out-of-network deductible and your HDHP is going to be sending you a check to reimburse some of the amount that you paid to the out-of-network provider, you'll only be able to reimburse yourself from your HSA to cover the portion of the bill that isn't paid by your HDHP. If in doubt, it's best to wait until the claim is processed before withdrawing funds from your HSA in situations like this.

If you see an in-network provider, it's up to you to decide whether you want to pay cash, or have the provider submit a claim to your insurance and then send you a bill for whatever you owe after the claim is processed. But there are a few things to understand here:

  • Depending on the size of your deductible, the doctor or hospital might ask you to pay some or all of your deductible in advance. But they would still be submitting your claim to your HDHP, so your up-front payment would not qualify for a cash discount. If you have concerns about the request for up-front payment, you can reach out to your insurer to discuss the issue.
  • HIPAA regulations (45 CFR 164.522) state that as long as you pay the bill in full (ie, whatever cash-pay rate the provider charges), you can ask the provider to not tell your health insurer about the treatment that was provided to you, and they have to comply.
  • If you get a discount by paying cash to an in-network provider, the money you pay won't be counted towards your health plan's deductible or maximum out-of-pocket costs, since a claim won't be filed with your insurer.

Clearly, there's no one-size-fits-all when it comes to whether you should take your provider up on their cash discount offer. It depends on several factors, including whether the service is covered by your insurance, how much care you think you'll need during the year, and of course, whether you have the cash to cover the bill.

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Compound It! is your weekly update of achievable, effective, no-nonsense HSA saving and investment advice, delivered by people who make it work in their own lives. For the latest info about your health and financial wellness, be sure to check out the HSA Learning Center, and follow us on Facebook and Twitter.


Compound It! What should you do with HSA funds when retirement time comes?

If you're approaching retirement — or contemplating a retirement that's still decades in the future — your health savings account (HSA) might be playing a role in your overall financial plan. If you've been contributing to your HSA for years and not withdrawing money, you might have a pretty good-sized nest egg squirreled away by the time you're ready to retire.

You might have been cash-flowing your medical expenses over the years — and saving your receipts — instead of paying for them with HSA funds. Or you might have been lucky enough to avoid major medical bills.

So, now you have to decide what to do with the money in your HSA. You won't be able to contribute any more money to your HSA once you're enrolled in Medicare (at age 65 for most people), but the money you've already accumulated in your HSA — plus any future growth in the account — is yours to use.

Hopefully, you'll stay healthy and active well into your golden years, and you might continue to avoid substantial medical costs. In that case, should you just leave the money in your HSA, letting it continue to grow with time? Or should you start to treat your HSA as a regular retirement account and just pay income tax on the withdrawals that aren't used for medical expenses? Or maybe a combination of those two approaches?

As with most things related to personal finances and health care, there's not really a right or wrong answer here, since it really depends on the rest of your circumstances.

What to consider about spending your HSA funds

You can't treat your HSA as a regular retirement account until you're 65. So although HSAs can function much like traditional IRAs, you have to wait a little longer. You can access the money in your retirement accounts — like 401(k)s and traditional IRAs — when you're 59.5 years old. At that point, you'll pay income tax, but not a penalty.

But for your HSA, that doesn't start until you're 65. Unless, of course, you're using the HSA funds to pay for qualified medical expenses, in which case there's never a penalty or income tax on the withdrawals. So, if you're retiring before age 65, your best bet is probably going to be to leave your HSA alone for a while, unless you need it for medical expenses.

Do you have long-term care insurance?

If not, what's your plan for covering the cost of long-term care that you might eventually need? Long-term care is expensive, and Medicare doesn't cover it. Medicaid does, but you have to exhaust most of your assets in order to qualify. If you don't have a plan in mind for how you might fund long-term care needs later in life, leaving your HSA alone might be a smart plan, since those funds can be used to cover the cost of any long-term care that you might eventually need.

And since withdrawals will be tax-free at that point (long-term care is a qualified medical expense), you'll be able to use 100% of the account balance to fund your long-term care costs, without having to worry about setting aside a chunk of it to cover taxes.

Don't forget about required minimum distributions (RMDs)

In most cases, your non-Roth retirement accounts are going to have RMDs that kick in once you turn 70.5 years old. At that point, you're required to start withdrawing some money each year (the IRS determines how much).

But there are no RMDs for HSAs, which means you have the option to just let that money sit in the account until if and when you either need it for medical costs or decide to withdraw it for something else and pay income tax on the withdrawal.

It doesn't have to be "all or nothing"

Maybe your overall plan is to leave your HSA money in the account until you need it someday for expensive medical treatment or long-term care costs. But that doesn't mean you can't also tap into your HSA for a one-time splurge vacation and pay taxes on the withdrawal. There's room for a little fun every once in a while.

Talk with a financial planner

We always recommend it, and with good reason. Speaking with a licensed financial pro can help you get a clear picture of how much money you can spend in retirement and which accounts you should tap first. As always, the information we provide here is a general guide, but you'll want to talk with a professional if you have questions about your specific circumstances.

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Compound It! is your weekly update of achievable, effective, no-nonsense HSA saving and investment advice, delivered by people who make it work in their own lives. For the latest info about your health and financial wellness, be sure to check out the HSA Learning Center, and follow us on Facebook and Twitter.