What is a Health Savings Plan (HSA)?

By: Nicholas Guido, CFP®

April 23, 2021

Estimated Reading Time: 6 minutes

What is a Health Savings Plan (HSA)?

In every investor’s life, there will be an opportunity or a requirement to obtain health insurance, either through your employer or in the private market. Most of the time, people seek out plans that have low deductibles, low copays, low premiums, and tons of coverage. In plans like this, it is easy to feel like your health insurance plan is taking more from you than it gives. But there is another option for you and your family - if you are healthy and have the ability to select a high-deductible health plan (HDHP), you may be eligible to open a Health Savings Account (HSA).

There are many benefits to having an HSA, but the largest benefit is that these accounts are triple tax-exempt. How does an account become triple tax-exempt? Below is the list of characteristics an HSA has to reach its triple tax-exempt status:

  1. Pre-Tax Contributions: all contributions to the HSA account are made on a pre-tax basis. While this is the general rule, there are a few states (New Jersey & California) that require you to pay state income tax on your HSA contributions.
  2. HSA Account Growth: all growth in you HSA account is tax-deferred. As with HSA contributions, there are a few state (New Jersey & California) that consider the growth taxable income.
  3. Withdrawals: as long as withdrawals are made for qualified medical expenses, there is no tax on any distributions. One additional note, once you enroll in Medicare your ability to make contributions to your HSA stop but you can utilize what you have saved and earned to pay for medical expenses.

Qualified Medical Expenses

The next question on your mind may be “well, what is a qualified medical expense?” These expenses range from motion sickness medicines to surgeries and midwifes. There is a more detailed list of qualified medical expenses through the link below:

HSA Qualified Medical Expense List

Another point on HSA withdrawals for qualified medical expenses is that you do not have to reimburse yourself right away. The expenses you incur can be saved (with proper documentation) for years and submitted all at once. This could create a larger lump sum distribution to you and your family later in life.

Eligibility Criteria for an HSA Account

As you read through this you are probably wondering, how do you know if you are eligible for an HSA account. We have listed out the criteria that one would have to meet to be eligible.

  1. You are enrolled in a high-deductible health plan (HDHP). In 2021, this means that your health insurance plan has a minimum deductible of $1,400 for single person coverage or $2,800 for family coverage. It also means that a maximum annual out-of-pocket expense of $7,000 for individuals and $14,000 for families. This includes things like deductibles, copayments and coinsurance, but not your premium.
  2. You are NOT enrolled in Medicare.
  3. You are 18 years or older and no one can claim you as a dependent to their tax return.

HSA Tax Benefits for 2021

In order to actually take advantage of the HSA account’s tax-advantaged characteristics, you will have to add money to your account each year. As with IRA accounts, there is a maximum amount that you are eligible to contribute to your account each year depending on if you are an individual or family. For individuals, the contribution limit is $3,600 plus a $1,000 catch-up provision if you are older than 55. For families, the contribution limit is $7,200 plus a $1,000 catch-up provision if you (each individual over 55) are older than 55.

Tax Benefits between HSA's and Flexible Spending Accounts (FSA's)

Some readers may be wondering how HSAs and FSAs (Flexible Spending Accounts) differ. Both of these account types are set up to pay for medical expense, but that is where the similarities between the two diverge. We have made a list of a few differences between the HSA and FSA accounts.

  1. FSA Annual Contribution Limits: Since the employer sets the limits on the FSA accounts they can be reduced but the maximum funding amount is $2,750. This is significantly different than the contribution limits on the HSA which are $3,600 for individuals and $7,200 for families with an additional $1,000 catch-up for people over 55.
  2. HSA Funds Rollover: HSA funds will continue to rollover year-over-year and compound based on the investments that you select to create and even larger pool of capital. The FSA accounts are setup so that if you do not use the funds by the end of the year you will lose them. There is one small caveat to this in that your employer may give you the ability to rollover $500, depending on the plan documents.
  3. Investment Options: HSAs give you the ability to invest the capital that you contribute each year and have it compound until you take a withdrawal. Due to FSAs having a 12-month lifespan, you lose the ability to invest the capital and the tax benefits that come with the HSAs.

If you are interested in learning more about whether an HSA is a potential strategy to add to your portfolio, we would encourage you to reach out to your advisor to plan both the timing and size of your HSA contributions and which investments to include in your account.


Important Disclosure Information

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.

April 23, 2021

Estimated Reading Time: 6 minutes

What is a Health Savings Plan (HSA)?

In every investor’s life, there will be an opportunity or a requirement to obtain health insurance, either through your employer or in the private market. Most of the time, people seek out plans that have low deductibles, low copays, low premiums, and tons of coverage. In plans like this, it is easy to feel like your health insurance plan is taking more from you than it gives. But there is another option for you and your family - if you are healthy and have the ability to select a high-deductible health plan (HDHP), you may be eligible to open a Health Savings Account (HSA).

There are many benefits to having an HSA, but the largest benefit is that these accounts are triple tax-exempt. How does an account become triple tax-exempt? Below is the list of characteristics an HSA has to reach its triple tax-exempt status:

  1. Pre-Tax Contributions: all contributions to the HSA account are made on a pre-tax basis. While this is the general rule, there are a few states (New Jersey & California) that require you to pay state income tax on your HSA contributions.
  2. HSA Account Growth: all growth in you HSA account is tax-deferred. As with HSA contributions, there are a few state (New Jersey & California) that consider the growth taxable income.
  3. Withdrawals: as long as withdrawals are made for qualified medical expenses, there is no tax on any distributions. One additional note, once you enroll in Medicare your ability to make contributions to your HSA stop but you can utilize what you have saved and earned to pay for medical expenses.

Qualified Medical Expenses

The next question on your mind may be “well, what is a qualified medical expense?” These expenses range from motion sickness medicines to surgeries and midwifes. There is a more detailed list of qualified medical expenses through the link below:

HSA Qualified Medical Expense List

Another point on HSA withdrawals for qualified medical expenses is that you do not have to reimburse yourself right away. The expenses you incur can be saved (with proper documentation) for years and submitted all at once. This could create a larger lump sum distribution to you and your family later in life.

Eligibility Criteria for an HSA Account

As you read through this you are probably wondering, how do you know if you are eligible for an HSA account. We have listed out the criteria that one would have to meet to be eligible.

  1. You are enrolled in a high-deductible health plan (HDHP). In 2021, this means that your health insurance plan has a minimum deductible of $1,400 for single person coverage or $2,800 for family coverage. It also means that a maximum annual out-of-pocket expense of $7,000 for individuals and $14,000 for families. This includes things like deductibles, copayments and coinsurance, but not your premium.
  2. You are NOT enrolled in Medicare.
  3. You are 18 years or older and no one can claim you as a dependent to their tax return.

HSA Tax Benefits for 2021

In order to actually take advantage of the HSA account’s tax-advantaged characteristics, you will have to add money to your account each year. As with IRA accounts, there is a maximum amount that you are eligible to contribute to your account each year depending on if you are an individual or family. For individuals, the contribution limit is $3,600 plus a $1,000 catch-up provision if you are older than 55. For families, the contribution limit is $7,200 plus a $1,000 catch-up provision if you (each individual over 55) are older than 55.

Tax Benefits between HSA's and Flexible Spending Accounts (FSA's)

Some readers may be wondering how HSAs and FSAs (Flexible Spending Accounts) differ. Both of these account types are set up to pay for medical expense, but that is where the similarities between the two diverge. We have made a list of a few differences between the HSA and FSA accounts.

  1. FSA Annual Contribution Limits: Since the employer sets the limits on the FSA accounts they can be reduced but the maximum funding amount is $2,750. This is significantly different than the contribution limits on the HSA which are $3,600 for individuals and $7,200 for families with an additional $1,000 catch-up for people over 55.
  2. HSA Funds Rollover: HSA funds will continue to rollover year-over-year and compound based on the investments that you select to create and even larger pool of capital. The FSA accounts are setup so that if you do not use the funds by the end of the year you will lose them. There is one small caveat to this in that your employer may give you the ability to rollover $500, depending on the plan documents.
  3. Investment Options: HSAs give you the ability to invest the capital that you contribute each year and have it compound until you take a withdrawal. Due to FSAs having a 12-month lifespan, you lose the ability to invest the capital and the tax benefits that come with the HSAs.

If you are interested in learning more about whether an HSA is a potential strategy to add to your portfolio, we would encourage you to reach out to your advisor to plan both the timing and size of your HSA contributions and which investments to include in your account.


Important Disclosure Information

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.