DoD Health Savings Account (HSA) 101: What, How, and Why You Should Take Advantage P1 2


A white background with a doctor's silver stethoscope and heart charm.

Welcome fellow Dukes! Today’s the day we talk about our first step to fortify the kingdom with extra defenses!! Just to quickly catch up on what you’ve accomplished so far (celebrate this!) – let us review:

First things first, you laid down your foundation by filling your coffers with cash each month, creating a budget to track it, and made the commitment to financial stability. Following the foundations, you constructed the walls, roof, and windows for your kingdom through your company 401(k) match, emergency fund, credit card, and building yourself a milestone map.

Now it is time to put up your first defense (if you qualify), a Health Savings Account (HSA)!

A white castle's door with two large columns leading to stairs. Two cannons sit at the top right in front of the columns.

Let’s rock and roll!!

What in the world is a Health Savings Account?

Official Definition:

“A type of savings account that allows you to set aside money on a pre-tax basis to pay for qualified medical expenses. A Health Savings Account can be used only if you have a High Deductible Health Plan (HDHP).”

Referenced from the HealthCare.gov website.

Duke of Dollars Definition

A savings account you can profit from by creating another pre-tax investing opportunity (3.4K for self-only HDHP coverage or 6.7K for family) to save tax mula.

HSA money grows tax-free until withdrawal after age 65, where it will be taxed at your income tax bracket, or, the same invested money can be used for qualified medical payments, without being charged the tax for use. Stated differently, a tax-free contribution and tax-free distribution to pay those expenses.

For us FIRE chasers, we can save on uncle sam’s tax bill while growing pre-tax money alongside your 401(k). For self-only HDHP covered individuals, this means almost $22,000 (maxed out HSA + 401(k)) can be reduced from your tax bill each year.

That’s $5,500 if you are in the 25% tax bracket!!

Add in another $5,500 from your a traditional IRA (if you choose to do so) and KAMBAM!

$6,827 saved on your tax bill!

Savings based only on a federal 25% tax rate.

An older gentleman smiling with money floating in air all around him.

We will go into more specific details on HSAs below.

A Bit of HSA History

Clinton Beginnings

The Clinton Healthcare Plan sparked a national debate over the government’s involvement in the medical profession. The debate continues even today with the question: “is health care a right or a good?” We are not going to get into the political debate here, only highlight it being part of the HSA’s history. Medical Savings Accounts came first from Clint, leading to HSAs later from President Bush.

“Archer MSAs were created to help self-employed individuals and employees of certain small employers meet the medical care costs of the account holder, the account holder’s spouse, or the account holder’s dependent(s).” – From IRS Publication 969

Archer MSAs allowed eligible individuals (limited those meeting the following: didn’t have health insurance, were self-employed, or small employers with 2-50 employees) to save for future qualified medical expenses. The limited eligibility didn’t deter Americans, as they were widely used and accepted.

Bush’s Expansion

With President Bush promising to expand MSAs, he did just that through Medicare expansion. He changed the name from Medical to Health Savings Account and required them to be linked to High Deductible Health Insurance Plans. MSAs still exist today for small employers or self-employed individuals with an HDHP.

Both MSAs and HSAs mixed capitalism with socialism within the US medical profession. The HSA was officially Approved by Congress in 2003 and became law in January 2004. For those in High Deductible Health Plans, the opportunity to take advantage of the new accounts began!

How can you qualify for an HSA?

Straight from the IRS:

Qualifications

  • You are covered under a high deductible health plan (HDHP)
  • You have no other health coverage except the following:
    • Liabilities incurred under workers’ compensation laws,
      tort liabilities, or liabilities related to ownership or use
      of property.
    • A specific disease or illness.
    • A fixed amount per day (or other periods) of hospitalization.
    • Coverage plans for the following:
      • Accidents.
      • Disability.
      • Dental care.
      • Vision care.
      • Long-term care.
  • You aren’t enrolled in Medicare.
  • You can’t be claimed as a dependent on someone
    else’s 2016 tax return.

What is a High Deductible Health Plan?

An HDHP has the following characteristics:

  • Higher annual deductible than typical health plans
  • A maximum limit on the sum of annual deductible and out-of-pocket medical expenses that you must pay for covered expenses.
    • Includes co-payments and other amounts, but not premiums

HSA Min/Max Amounts

 Self-only coverageFamily Coverage
Minimum annual deductible$1,300 $2,600
Maximum annual deductible and other out-of-pocket expenses (in-network)$6,550 $13,100

If you meet the minimum criteria here, and the qualifications above -> you are golden to open your HSA!

You still qualify for an HSA if your HDHP provides preventive care benefits without a deductible or with one less than the minimum annual deductible, such as periodic health evaluations (physicals).

Contribution limits?

  • Self-only plan? $3,400
  • Family plan? $6,750

For those who are of age 55 or older at the end of your tax year, you can contribute an additional $1,000 to your HSA.

What if I’m married and we have a family coverage from each employer?

The IRS states that if either spouse has family HDHP coverage, both are treated as having that coverage. This means that even if both spouses had family coverage qualifying for an HSA, the total that family can contribute is $6,750 total – even if both spouses have their own plans.

Can my employer contribute?

Yes! Employers can directly contribute to your HSA, your spouse can as well. The imperative point here is these contributions count towards the limit, unlike 401(k)s.

In other words, if your employer contributes $3,400 for the given year to your self-only HSA qualified plan, then you can’t contribute.

HSA providers require specific balances before you can use your HSA as an investment account vs a savings account. We will talk more about this in part 2.

Do I lose it if I don’t use it?

HSA account balances roll over each year. Further, if you were to change jobs and you opened your HSA through that employer, you are still in control of that account and your money. Similarly to 401(k)s.

A guy with a dumbfounded face with text "Huh, wait wut"

 

 

 

Even more awesome is that if you were to save receipts from your doctor visits starting today, even if you paid with after-tax money, you can utilize those receipts later with reimbursement coming from your HSA balance. Talk about an interesting emergency fund strategy if you wanted an extra backup plan (almost like plan Z?).

Concluding thoughts

HSAs can be a great vehicle to take advantage of pre-tax investing dollars and tax savings. We’ve only just hit the surface and will go into more details on opening an HSA, investing in an HSA, and utilizing it in your Kingdom’s plan in our next post.

Do you currently use an HSA? Have you found it useful? Let us know in the comments!

Thanks for reading and let us know if you have any questions!!

 

 

 


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2 thoughts on “DoD Health Savings Account (HSA) 101: What, How, and Why You Should Take Advantage P1

  • Dividend Daze

    Love my HSA Account. Only had it for a few months so far but you can still see the benefits. Figured it isn’t a bad idea if you were to retire early, and have built up the account. Gives you more of a cushion on your healthcare costs, which are often an overlooked big expense. Also it is nice being able to invest in funds inside the account so that money can grow even more. Also the contribution limit for 2017 is 3.4k, but going up $50 in 2018. Thanks for sharing! Great info!

    • Master Duke Post author

      It is an awesome cushion for one of the most expensive parts of FI. It adds a bit of a ring to it when you invest into healthcare companies within it too huh? haha!

      Thanks for the catch on the numbers!!