This article appeared in the Winter 2017-18 edition of The Classroom Teacher.

A health savings account, or HSA, is an account that you can set up through a bank or other financial institution (or possibly through your school district if your district offers this benefit) that allows you to set aside money for future medical costs. It is designed specifically to be used in conjunction with a high-deductible health plan such as TRS ActiveCare 1-HD, or the new TRS-Care plan for retirees under age 65.

Can anyone set up an HSA? 

No — to be eligible for an HSA, your insurance plan must have a deductible no lower than $1,300 for individuals and $2,600 for families (2017 limits). 

Why would I want to contribute to an HSA? 

An HSA has tax benefits: your contributions lower your taxable income, any interest you earn on the account is tax free, and when you take money out to pay for your medical expenses, it is not taxed. (Note: If you use HSA funds for ineligible expenses those funds will be subject to taxes; if you are under age 65 you will also pay a penalty fee.)

The goal is to set aside funds to help you cover future medical expenses. Many school employees and retirees are now enrolled in high-deductible plans that do not provide coverage until the deductible is met. The HSA can help pay the costs you incur until you meet your deductible and your insurance benefits kick in.

If you are relatively healthy and have the means to set aside some funds every month, the HSA can be very beneficial if the time comes when you must pay large medical, dental, or prescription drug bills.

Example: You set aside $50 per month to contribute to your HSA. This lowers your taxable income by $600 per year. At the end of five years, you have saved $3,000, which you can use to help cover large expenses such as a hospital stay or dental bills.

What if I have medical bills every year that I need to cover, so that I can’t save up a lot over time?

An HSA can still be helpful because of the tax benefits. It is ideal when you are in a position that allows you to save up larger amounts to be used for a costly medical bill, but even if you spend your entire account each year, you are still realizing the tax savings.

What if I move away or retire? 

Your HSA is portable, so if you change jobs and/or insurance coverage, or even retire, it can still be used. If you switch to a plan that does not meet the high-deductible threshold, you will no longer be able to contribute to the HSA. But you can continue to use your accumulated HSA funds until they run out. 

Are there fees associated with these accounts? 

Typically there will be fees, which can include monthly fees (sometimes these will be waived if the account maintains a minimum balance), set-up fees, and/or transaction fees. The fees are usually low (the average monthly fee is well under $5) but the types and amounts vary considerably among different institutions, so do your homework. A quick internet search will turn up several comparisons and rankings of institutions based on their HSA fees. 

How much can I contribute? 

Contribution amounts are limited — the current year limit is $3,350 (individual) or $6,750 (family). You can contribute up to $1,000 more if you turn 55 by the end of the tax year.

What if I need the money for a non-medical emergency? 

You can spend the HSA funds for other purposes, but you will be heavily taxed/penalized. 

What if I don’t have a high-deductible plan? 

Consider a flexible spending account (FSA), if your district offers one. These plans are similar to HSAs in some respects, but can only be obtained through your employer. A key difference is that an FSA is “use it or lose it” — funds not spent within the year do not roll over to the following year — so it is important to gauge your expected costs carefully when making the decision about how much to put into your FSA. Also, unlike an HSA which allows direct spending on medical costs, an FSA is a reimbursement plan, so you will pay your expenses up front and be paid back after submitting a claim.

Note: There are important HSA rules and timelines as you approach age 65; please consult your HSA administrator or a financial advisor.