Everywhere on the Internet, you will easily find the basics on health savings accounts (HSAs) about who is eligible, what the rules are, etc. However, as they say, “the devil is in the details,” both good and bad.
Is an HSA right for you?
Using an HSA is, in fact, a big pain in the ass. It’s not easy to manage and use it efficiently and a certain amount of administration is required. While financially beneficial, I have to view it as getting paid a decent amount of money to do some low-level administrative work.
Below are the things I “wish I knew before” I got started with the HSA:
#1 Start Saving in an HSA as Early as You Can
If you’re going to set up an HSA, the younger you are, the more money you can “make” with it! If you are eligible, see how your HSA with high-deductible plan compares with your other health insurance options in my other post, “Health Insurance Plan Comparison Spreadsheets.”
It’s one of the best retirement account options out there, without actually being limited to retirement. It’s pre-tax money going into an investment account and tax-free withdrawals (for qualified medical expenses). There’s no other investment account like that. It’s essentially tax-free income that you can use before retirement. As much as I hate the administrative side of the HSA, I think it’s the financially savvy thing to do, and I’m going to teach my kids to set up an HSA (and a Roth IRA) account as soon as they can.
#2 Watch Out for Employer Contributions and Contribution Limits to the HSA
If your employer contributes to your HSA, make sure that you account for that in your overall contribution limit and set up your contributions accordingly. We didn’t pay attention to that and over-contributed last year. You may pay a penalty for excess contributions. Fortunately, you can typically rectify it online and with the IRS before the tax filing deadline, but it’s more admin work for you!
#3 Set Up a Stable HSA Provider Outside of Your Employer’s Provider
HSA providers can change even if you don’t change jobs. Set up an HSA provider account that is separate from your employer. Even if you don’t change employers, your employer may often change the HSA provider from year to year or even mid-year. It gets complicated to manage funds in multiple accounts. Ideally, we would have kept it to two. Additionally, some of the employer’s HSA providers charge fees for the investment portion of the account.
I followed the Finance Buff’s recommendations and opened an account at Fidelity which is fee-free. (Seriously, the Finance Buff author is like the financially savvy uncle I always wish I had!) It seemed like a no brainer when compared to HSA providers that do charge a fee to invest your HSA funds.
#4 Avoid Investing With the HSA Provider That Your Company Uses
Why? Because when your company decides to change providers, you have usually have to liquidate all investments or roll over to another provider. When you are forced to rollover your investments, you have to liquidate your investments and find equivalents in the new account, regardless of market timing. To keep it simple, keep cash funds in the employer account and only make investments with your own provider. Many employer HSA providers also charge fees for investment accounts – all the more reason to choose your own provider that doesn’t charge fees.
#5 Create a Physical and/or Virtual Home for Medical Expense Receipts
Create a physical home (a file folder, envelope, box, sock, whatever!) for the expense receipts as well as a file folder on your computer. Separate that into two piles – reimbursed and not yet reimbursed. Creating the structure before you begin accruing medical expenses increases the likelihood of your staying organized and getting the most or anything out of your HSA! This sounds so basic, yet you would be surprised how critical it is to not hating your HSA. Just ask my husband for which paperwork is the all-time enemy of mankind. Even if you only reimburse yourself once a year or every 5 years (theoretically, there is no time limit), having the organization structure is what makes this manageable.
#6 Avoid Using the HSA Debit Card
I’ve found that reimbursing myself later gives me much more flexibility and time to think about which HSA I want to draw from and when I want to withdraw it. It also potentially allows your money to grow in the meantime. The flexibility offsets the inconvenience of having to manually reimburse.
Another reason to avoid using your debit card is that some people have the debit cards that draw from both your HSA and your LPFSA (the FSA account that you are allowed to have in conjunction with an HSA). Watch the debits carefully because a technical error may draw from the HSA instead of the LPFSA (it happened to me!) Why is this a problem? Your LPFSA is “use it or lose it” for vision and dental expenses in the calendar year, while your HSA is not. You should always use up your LPFSA first, so you have to monitor the debits carefully to make sure there are no technical errors (which sadly, are quite likely) and time-consuming to fix.
#7 Plan How You Want to Use Your HSA Funds
It’s no use for you if you never use the money in the account, so have a plan for what medical expense you would like to use the money on. The longer you wait, the “less” the medical purchase will cost, assuming growth in your savings. A prudent way to manage the funds is to leave a portion uninvested so you can access it immediately if needed, and invest the remainder. Ideally, you should not draw from the invested funds when the market is particularly down.
#8 Review the Complete HSA Eligibility List
Make sure you know what is considered an HSA-eligible expense to get the most out of your HSA. Medical bills and services with conventional medical providers are usually obvious HSA-eligible expenses. However, depending on what the balance of your medical and financial needs are, you should know that there are a lot of day to day items that are HSA-eligible items now, particularly after the CARES Act of 2020. (This post calls the items out about half-way down the page.)
The website, HSA store, seems to have the most current and comprehensive eligibility list. Familiarize yourself with the list, so you can save those receipts to reimburse yourself as needed. Some of the less obvious, but commonly purchased items that I found useful here are many items of common use: OTC pain relief, allergy meds, face masks, Covid tests, sunscreen, orthotic insoles (OTC or custom), sports wraps and bandages, and first aid products.
#9 Watch Out for State Taxes on HSA Investment Income If You Live in CA or NJ!
HSA investment income is currently federal and state tax-free everywhere except California and New Jersey. It doesn’t mean that HSA is not beneficial in those states. It just means that if you live in either CA or NJ, your HSA investment earnings are subject to state tax (they are still federal tax-free). Again, my “uncle” at the Finance Buff has a very helpful post on this called, “California and New Jersey HSA Tax Return Special Considerations.”
#10 Pay Attention to How Much Each Medical Service Costs
You can ignore the costs and just know that you are saving money overall, or you can be like me, and start to realize that it makes very little sense to pay $300 for your doctor’s wrong opinion. Having an HSA means you have a really high deductible. So, if you don’t plan to meet your deductible, then every appointment and small procedure affects how much money you will be saving.
Using an HSA can be a lot of work – think about whether you can do the job. It can save and earn you a lot of money, but you have to use it correctly to maximize the financial benefits.
Do you have extra tips? I’m still learning, so would love to hear more ideas! Email me at firstname.lastname@example.org.
Best HSA provider:
CA and NY state tax considerations
Comprehensive list of HSA eligible expenses