Is It Worth Your Time and Money To Set Up an HSA?

LISTEN: Is it worth starting a health savings account? HealthQ has answers.

When Mike McKee thinks about saving money for the future, he has a few priorities. Maximizing your retirement is one of them. Building your child’s college fund is another.

Open a health savings account? Not so much, although he qualifies for it because of his high-deductible health plan.

“I’m so frustrated with the system that has anything to do with medical economics,” said McKee, 42, an independent musician in Nashville, Tennessee. “I’m so emotionally disconnected that I have to be very careful to be logical about this.”

More Americans are eligible to open an HSA — a type of tax-free savings account that lets them save money for medical expenses — after changes that were part of last year’s new legislation. But an HSA can be a headache to set up and navigate.

Here’s what you need to know about how they work and when they’re worth it.

Like a tax-free investment account for medical expenses

With an HSA, you set aside money from your pre-tax salary and can use that money to pay for medical expenses later. Most health-related purchases qualify, including medications, eyeglasses, orthodontics and many types of therapies.

You have options for the money in the account, including investing it. Some people call HSAs a “triple tax advantage”: There are no taxes on the money coming in, no taxes on the interest earned, and no taxes on the money going out for medical expenses.

Pro tip: An HSA is not the same thing as an FSA, or flexible spending account, even though they sound similar. An FSA also lets you put your pre-tax income into an account for medical expenses, but you typically lose unspent money at the end of the calendar year. In contrast, HSA money stays in your account until you spend it. Think F for “forfeit” and H for “hold on.”

The administrative work of an HSA can be a real obstacle

First, you need to find out if your health plan allows an HSA. Most high-deductible health plans do this, but with these plans, you may have to spend thousands of dollars before most benefits kick in. Starting this year, plans in the Affordable Care Act individual market that are classified as “bronze” or “catastrophic” are also eligible. (The easiest way to find out if you qualify is to call the number on the back of your insurance card and ask.)

Next, you must open the HSA yourself through a financial institution — although if you get health insurance through employment, your employer might have preferred institutions. And finally, you need to keep track of your eligible medical expenses. You pay for them using a special debit card or by submitting reimbursement requests, usually through an online portal. Either way, it’s a good idea to keep receipts.

People and politics

If you’re living paycheck to paycheck, you may have trouble taking advantage of the tax savings associated with an HSA. “HSAs, in this way, tend to benefit higher-income enrollees more, because they are the ones who have the disposable income to put aside at the end of the month,” said Michelle Long, a policy researcher at KFF, a nonprofit health information organization that includes KFF Health News. Additionally, people with higher incomes and higher tax brackets have more to gain by receiving discounts on their taxes, which is essentially what an HSA offers.

Katherine Ruppelt of Nashville Public Radio contributed to this report.

HealthQ is a health series from journalists Cara Anthony and Blake Farmer, accessible guides to an inaccessible health care system. This is a collaboration between Nashville Public Radio and KFF Health News.

KFF Health News is a national newsroom that produces in-depth journalism on health issues and is one of KFF’s primary operating programs, an independent source of health policy research, polling and journalism. Learn more about KFF.

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