Health Savings Account

A Health Savings Account (HSA) is a tax-advantaged account that can help you save for medical expenses.  You can only use it if you have a high-deductible health plan (HDHP).  HDHPs are defined as health plans that have a deductible of at least $1,500 ($3,000 for a family) and total out-of-pocket annual costs of no more than $7,500 ($15,000 for a family).  You create an HSA after electing to use a HDHP.  You can contribute $3,850 annually ($7,750 for a family).

Basics of a Health Savings Account

You can pay for current or future medical expenses, such as deductibles, copayments, coinsurance, and prescription drugs.  Unlike an FSA, you can carry over unspent money to future years.  You also own the HSA, unlike an FSA which is owned by an employer.  Contributions are made pre-tax and you have a maximum contribution each year.  HSAs also have triple-tax benefits: contributions, earnings, and distributions for qualified medical expenses are not taxed.

A Health Savings Account can make HDHPs much more affordable than other plans if you have a reasonably high likelihood of few doctor visits.  If you expect to have many doctor visits or a major medical need then it might not be the best option.

There is caveat to the tax treatment of HSAs.  If you remove money for non-medical expenses prior to age 65 you pay a 20% penalty plus income tax on the amount withdrawn.  If you are older than 65 you do not owe the 20% penalty, but you still owe income tax.

Other Benefits

  • There is usually no minimum deposit.
  • You can invest HSA funds in stocks, bonds, mutual funds, and other investment vehicles.
  • You can use your HSA funds to pay for health insurance premiums if you’re unemployed or receiving COBRA coverage.
  • You can use HSA funds to pay for qualified medical expenses for your spouse and dependents.
  • You can use HSA funds to pay for Medicare premiums

You should seriously consider using an HSA if you have an HDHP.  You will not find triple tax savings anywhere else, unless you live in a state that gives you a deduction for education savings.  If you have the choice to switch to an HDHP you should seriously consider that, too.  As a solopreneur you have the luxury to decide theses elements yourself.