HealthEquity Health Savings Account (HSA)
Before-tax contributions to a Health Savings Account can be used to pay qualified medical expenses. Money in an HSA account grows tax free. Withdrawals from an HSA after age 65 for anything without penalty.
In the past, when it was time to enroll our medical insurance plan, we always selected the option with the least amount of premium and usually it was the HMO plan. For us, the decision was rather easy to make: Both of us are in good health and the only time of the year that we actually needed to see a doctor was the annual physical. And the kids, they also have their annual checkup and once in a while, they may need antibioc for infection, and that’s it. Since we don’t see doctors a lot and none of us is on any kind of medicine, we want to lower our premium, even though it may mean some restrictions on how we could choose a doctor if needed.
Starting this year, however, my employer changed the way health insurance plans were offered in order to reduce costs and “let employees actively manage their health and their health care costs” as the my employer put it. Instead of giving us several options with different premiums, the only health plan we could use in 2013 is a plan from Cigna Health that comes with a Health Savings Account (HSA), which is also quite new to us since we never have used a HSA account before.
What is an HSA Account?
If you are not familiar with HSAs, here are some highlights of what they are and how they work:
- Health Savings Accounts (HSAs) are tax-advantaged medical savigns accounts that were created in 2003 for individuals to contribute pre-tax dolloars to cover part of the cost of a high-deductible health plan.
- To set up a HSA account, you must participate in a high-deductible health plan (HDHP). For 2013, the minimum deductible is $1,250 for self-only coverage and $2,500 for family.
- The IRS has established pre-tax contribution limit to a HSA account at $3,250 for a self-only HDHP plan and $6,450 for a family plan.
- Contributions to an HSA account can be used to pay for qualified medical expenses without paying taxes during the year before reaching the deductible limit. There will be a 20% tax penalty on distributions from an HSA that are not used for qualified medical expense.
- An HSA account is independent to your employment and money in the account is yours that you can take it with you after the termination of employment. Unlike Flexible Spending Accounts (FSAs), leftover money in an HSA account is rolled over to the next year and can be used to cover future medical expenses.
- Earnings from contributions to an HSA account will grow tax-free, just like an IRA account, and after the age of 65, there will be no penalty for withdrawal from an HSA account for whatever uses and only income tax will be paid for the distribution, again just like an IRA account.
Benefits of an HSA Account
Since I didn’t have any other choices in terms of health insurance, I had to go with an HDHP with an HSA account. But after doing my research, I came to the conclusion that an HSA is actually a better choice for us for several reasons:
- Comparing to the traditional health insurance plan I had last year, we saved about $2,000 in premium by switching to an HDHP with an HSA account.
- Even though the new health plan has a $3,000 annual deductible for the whole family, I don’t expect we can reach that limit, barring any kind of emergency, since we mostly use heath insurance for preventive care and that is 100% covered by the insurance.
- Even if we reach the deductible limit, there’s a still a out-of-pocket maximum.
- My employer contributed $1,200 seed money into the HSA account, which is free money for us and effectively reduces our deductible.
- We can contribute up to $5,250 before-tax money (2013 contirbution limit $6,450 minus $1,200 employer contirbution) into the HSA account, which lowers our current tax bill.
Of course, the tax-free contribution to and tax-free growth of assets in an HSA is one of the most appealing reasons for us given our low medical expenses. Whatever we have in an HSA account now can be used later for medical care when we need it or even retirement
HealthEquity HSA Account
In our case, we didn’t have the freedom to choose which HSA administrator to use for our HSA account. The one that is provided by my employer is HealthEquity. For the health care part, we received a HealthEquity debit card that we can use to pay for our medical expenses. Even though any expense before reaching the $3,000 deductible limit is our responsibility, we are advised by our employer and HealthEquity that we should not pay those expense up front, except for co-pay which is a fixed amount for every visit. Instead, we should ask the health provider to bill the insurance company and we pay the bill after receiving it from the insurance since the negotiated price between the insurance and the provider is usually lower than the up front cost of service, as we were told.
As for the investment part, HealthEquity actually has a few nice, low cost funds to choose from.
- American Funds Growth Fund of America (GFAFX)
- American Funds American Balanced (BALFX)
- Baron Small Cap Fund (BSCFX)
- Dodge & Cox Income Fund (DODIX)
- Dodge & Cox International Stock Fund (DODFX)
- Dreyfus Smallcap Stock Index (DISSX)
- Dreyfus Appreciation Fund (DGAGX)
- Fidelity Blue Chip Value (FBCVX)
- Fidelity Capital Appreciation (FDCAX)
- Harding Loevner Emerging Markets (HLEMX)
- Laudus International MarketMasters (SWOIX)
- T. Rowe Price Equity Income Fund (PRFDX)
- Vanguard Large Cap Index Signal (VLCSX)
The one that I selected is Dodge & Cox International Stock Fund (DODFX). I knew this fund pretty well, having own it in a non-retirement account for years. Since right now the investment portfolio in the HSA account is rather small, I don’t see the reason to diversify just yet because I want to grow the account fast, even though it means more volatility.
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