HSA with Optum Bank

HSA with Optum Bank

Three years ago, my current employer introduced a health savings account (HSA) as an option for my medical benefit.

I briefly went over the plan but ultimately chose a PPO version.

It’s not until recently that I discovered that HSA plans offer so many benefits and can be used as my third tax-advantaged plan.

Some even called the health savings account the best tax-advantaged option available today.

Needless to say, after careful research, during this year’s enrollment period, I opted in for my company’s HSA offering.

The mainstay of an HSA plan is its companion high-deductible health plan.

High-Deductible Health Plan (HDHP)

With high deductible health, you usually pay a lower premium in return for having a higher deductible.

The term deductible simply means the amount you need to pay out of your own pocket for medical expenses before your insurance kicks in.

Just so you know, most medical services like doctor visits, MRIs and most prescriptions count towards your deductible.

Another thing to keep in mind, you pay nothing for preventive care like annual wellness checkups.

For example, let’s say you went for a jog and fell and broke your arm. You need the ambulance to take you to the hospital and the doctors did their magic.

You’re feeling well again, but the hospital bill was $10,000. If your deductible is $1,500 and you paid the $1,500 out of pocket then your insurance will kick in.

A high-deductible plan is currently defined as $1,400 or more for individual coverage or $2,800 or more for family coverage in 2020.

Once your insurance kicks in, you pay coinsurance until you reach the out-of-pocket maximum.

In contrast to a PPO plan where there are copays for office visits. HDHP does not offer copays, instead, there’s coinsurance.

Typically, copays are $30 for doctor visits, $50 for urgent care, and $200 for emergency room visits.

Coinsurance is dependent on your plan so make sure to do some due diligence.

Health Savings Account (HSA)

The best thing about high-deductible health plans is that it is coupled with a health savings account (HSA) and a flexible spending account (FSA).

I will not discuss FSA much in today’s posts.

An HSA is an account that you can contribute to and withdraw money from tax-free.

It can help you pay your deductible, co-payments and other qualified healthcare-related expenses. They can range from eyeglasses to dental work.

You can take money out to pay for non-medical expenses, but if you’re under 65 years old then you have to pay taxes and penalty.

With an HSA, you and your employer can contribute money tax-free. How much you can contribute is set by the IRS and may change from year to year.

For 2020, you can contribute up to $3550 for a single account and $7100 at the family level. Those over the age of 55 can contribute $1,000 on top of their normal contributions.

Of note, in order to participate in an HSA, your out-of-pocket maximum can’t exceed $6,900 for individuals and $13,800 for families.

The money in your HSA is yours, even if you switch jobs. Even if your new employer doesn’t offer an HSA, you’re still able to use your HSA account to pay for qualified medical expenses, including prescriptions and over-the-counter products. For a good listing of which pharmaceutical products is qualified check out HSA list.

Yet another plus for HSAs is that leftover money at the end of the year will roll over year after year.

Triple Tax Advantage

Better yet, you can even invest excess HSA money, grow it tax-free and use it for retirement.

To reiterate, the 3 big tax breaks from HSAs are.

First, workers get an immediate tax deduction for the money they contribute to a health savings account. Second, after making their contribution, they’re then able to invest that HSA money on a tax-deferred basis, paying no taxes on interest, dividends, or capital gains within the account. Third, withdrawals from HSAs are tax-free as long as you use the money toward qualifying healthcare expenses.

Lastly, another plus to HSA is that you do not need to have earned income to contribute. Retirees up to the age of 65 can still take advantage of an HSA.

The HSA Loophole

When it comes to using your HSA it is very simple. Most HSA plans will send you an HSA debit card. Whenever you incur a healthcare expense (such as prescriptions copay), you can pay for the expense by simply swiping your HSA debit card as you would similar to a bank debit card.

Another way is to pay for the qualified medical expenses out of pocket and reimbursing yourself at a later time.

The loophole is that according to the IRS, there is no time limit fo when you have to reimburse yourself.

So the idea is to allow your HSA account to grow unhindered, taking advantage of compounding interest.

The kicker is that you have to be diligent in record keeping. Save all of your receipts and bills so that you can show proof of the expenses when you’re ready to use your HSA account to reimburse yourself.

According to a Forbes article, you need to be mindful of the following IRS restrictions:

  • HSA withdrawals were only used to pay for qualified medical expenses.
  • Medical expenses weren’t paid for or reimbursed from another source
  • You didn’t take an itemized deduction for these medical expenses in any year.

When you make a withdrawal from your HSA account you have to fill out Form 8889. The HSA provider, Optum in my case will send Form 1099-SA containing your distribution amounts.

Other advantages of an HSA account

All Medicare premiums except Medigap can be paid from HSAs. There are no required distributions, unlike traditional 401k and IRA.

Any funds that have been growing tax-free can be used for non-qualified medical expenses after age 65 and avoid the 20% penalty.

However, non-qualified medical expenses distributions will be taxable similar to 401k and traditional IRA.

Investing options with Optum Bank

Dependent on your individual HSA plans, but generally, if you have accumulated more than $2,000, you’re eligible to invest anything in excess of that in $100 increments.

Optum Bank offers a generous list of mutual funds to choose from, including Vanguard index funds.

Optum has a similar offering to a traditional 401k, there are a plethora of low-cost index funds to choose from.

I am planning on using my HSA funds to invest in the three portfolio fund with a slight twist.

I will buy Vanguard Total Stock Market Index Instl (VITSX), Vanguard Total Bond Market Index I (VBTIX) and a real estate index fund (VGSNX).

HSA Recap

So let’s do a quick recap.

The biggest advantage of an HSA is its triple-tax benefits. You contribute pre-tax money, withdrawals (for qualified medical expenses) is tax-free and if you chose to invest the money it will grow tax-free.

I am kicking myself for not enrolling in this plan three years ago when it was offered to me.

There’s one final caveat, it’s probably will work best if you’re still young and relatively healthy.

If you have a big medical needs then this option may not be for you since it is cost-prohibitive.