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Health Savings Accounts: Are They Just What the Doctor Ordered?

Are health insurance premiums taking too big of a bite out of your budget? Do you wish you had better control over how you spend your healthcare dollars? If so, you may be interested in a Health Savings Account (HSA).

How does this healthcare option work?

An HSA is an individually-owned, tax‐advantaged account that you can use to pay for current or future IRS‐qualified medical expenses. With an HSA, you’ll also have the potential to build more savings for healthcare expenses or additional retirement savings through self-directed investment options.* Let's look at how an HSA works with a High Deductible Health Plan (HDHP) to enable you to cover your current healthcare costs and also save for your future needs.

Before opening an HSA, you must first enroll in an HDHP, either on your own or through your employer. An HDHP is "catastrophic" health coverage that pays benefits only after you've satisfied a high annual deductible. (Some preventative care, such as routine physicals, may be covered without being subject to the deductible). For 2016, the annual deductible for an HSA-qualified HDHP must be at least $1,300 for individual coverage and $2,600 for family coverage. However, your deductible may be higher, depending on the plan.

Once you've satisfied your deductible, the HDHP will provide comprehensive coverage for your medical expenses (though you may continue to owe co-payments or coinsurance costs until you reach your plan's annual out-of-pocket limit). A qualifying HDHP must limit annual out-of-pocket expenses (including the deductible) to no more than $6,550 for individual coverage and $13,100 for family coverage for 2016. Once this limit is reached, the HDHP will cover 100% of your costs, as outlined in your policy.

Because you're shouldering a greater portion of your healthcare costs, you'll usually pay a much lower premium for an HDHP than for traditional health insurance, allowing you to contribute the premium dollars you're saving to your HSA. Your employer may also contribute to your HSA, or pay part of your HDHP premium. Then, when you need medical care, you can withdraw HSA funds to cover your expenses, or opt to pay your costs out-of-pocket if you want to save your HSA funds.

An HSA can be a powerful savings tool. Because there's no "use it or lose it" provision, funds roll over from year to year. And the account is yours, so you can keep it even if you change employers or lose your job. If your health expenses are relatively low, you may be able to build up a significant balance in your HSA over time. You can even let your money grow until retirement, when your health expenses are likely to be substantial. And, after age 65, funds in your HSA can be used for any purpose without penalty (subject to income tax).

How can an HSA help you save on taxes?

An HSA provides triple tax savings.** Here’s how:

  • Contributions to your HSA can be made with pre-tax dollars and any after-tax contributions that you make to your HSA are tax deductible. 
  • HSA funds earn interest and investment earnings are tax free. 
  • When used for IRS-qualified medical expenses, distributions are free from tax. 

Can anyone open an HSA?

  • If you have a qualified HDHP - either through your employer, through your spouse, or one you’ve purchased on your own - chances are you can open an HSA. Additionally:
  • You cannot be covered by any other non-HSA-compatible health plan, including Medicare Parts A and B. 
  • You cannot be covered by TriCare. 
  • You cannot have accessed your VA medical benefits in the past 90 days (to contribute to an HSA).
  • You cannot be claimed as a dependent on another person’s tax return (unless it’s your spouse).
  • You must be covered by the qualified HDHP on the first day of the month.

How much can you contribute to an HSA?

For 2016, you can contribute up to $3,350 for individual coverage and $6,750 for family coverage. This annual limit applies to all contributions, whether they're made by you, your employer, or a third party. You can make contributions up to the tax deadline the following year, typically April 15 (i.e., you can make 2015 contributions up to April 15, 2016). If you're 55 or older, you may also be eligible to make a $1000 "catch-up contribution" to your HSA, but you can't contribute anything once you reach age 65 and enroll in Medicare.

Can you invest your HSA funds?

HSA Bank provides unique opportunities to invest HSA funds in self-directed investment options. It’s a great way to potentially grow HSA funds for healthcare expenses, or save funds as a nest egg for retirement.

How can you use your HSA funds?

You can use your HSA to pay for a wide range of IRS-qualified medical expenses for yourself, your spouse, or tax dependents. An IRS-qualified medical expense is defined as an expense that pays for healthcare services, equipment, or medications. Funds used to pay for IRS-qualified medical expenses are always tax-free.

HSA funds can be used to reimburse yourself for past medical expenses if the expense was incurred after your HSA was established. While you do not need to submit any receipts, you must save your bills and receipts for tax purposes.

Questions to consider

  • How much will you save on your health insurance premium by enrolling in an HDHP? If you're currently paying a high premium for individual health insurance (perhaps because you're self-employed), your savings will be greater than if you currently have group coverage and your employer is paying a substantial portion of the premium.
  • What will your annual out-of-pocket costs be under the HDHP you're considering? Estimate these based on your current health expenses. The lower your costs, the easier it may be to accumulate HSA funds.
  • How much can you afford to contribute to your HSA every year? Contributing as much as you can on a regular basis is key to building up a cushion against future expenses.
  • Will your employer contribute to your HSA? Employer contributions can help offset the increased financial risk that you're assuming by enrolling in an HDHP rather than traditional employer-sponsored health insurance.
  • Are you willing to take on more responsibility for your own healthcare? For example, to achieve the maximum cost savings, you may need to research costs and negotiate fees with health providers when paying out-of-pocket.
  • How does the coverage provided by the HDHP compare with your current health plan? Don't sacrifice coverage to save money. Read all plan materials to make sure you understand benefits, exclusions, and all costs
  • What tax savings might you expect? Tax savings will be greatest for individuals in higher income tax brackets. Ask your tax advisor or financial professional for help in determining how HSA contributions will impact your taxes.

How CNB Can Help?

Canandaigua National Bank & Trust and leading HSA provider, HSA Bank, have teamed up to bring HSAs to consumers and businesses. If you would like to learn more or have any questions, please visit us online at, stop by any of our Bank Offices, or contact our Customer Call Center at 585-394-4260.

For additional information on Health Savings Accounts, click here to view a summary of services.

*Investment accounts are not FDIC insured, may lose value and are not a deposit or other obligation of, or guarantee by the bank. Investment losses which are replaced are subject to the annual contribution limits of the HSA.
**Federal Tax savings are available no matter where you live and HSAs are taxable in AL, CA, and NJ. HSA Bank does not provide tax advice. Consult your tax professional for tax‐related questions.

Sources: Broadridge Investor Communication Solutions, Inc.; HSA Bank, a division of Webster Bank, N.A.