Financial Friday:Health Savings Accounts (HSA)

First published: Apr 25, 2011

How much should you have in your HSA?
xray 179x300 Money Smart Tip #4:  Health Savings Accounts (HSA)

If you are unfamiliar with this type of account –  a Health Savings Account allows you to save money free of taxes and the money can be used for anything allowed by the IRS as deductible health items.  That has traditionally been anything from band-aids to surgery co-pays, although I think they are changing that to not include over the counter items.

Our Medical Bills

My son broke his arm the day after Christmas.  He was playing with he new toys and fell down just the wrong way and cracked his elbow.

I have an HSA through work – thank goodness, or not only would we have been worried about our son, but we would also have been worried about finding the money to cover the bill.

IMAG1359 300x180 Money Smart Tip #4:  Health Savings Accounts (HSA)

The above picture (please excuse the poor quality) is the bill we recently received for the medical care he needed.  This is after insurance processed the bills and is our portion to pay.

Before I get into my answer to the title question, I want to preface this with the fact that I am fairly conservative when it comes to financial responsibility.  I don’t believe in borrowing for items unless they are absolutely necessary or are highly likely to return a profit and I am a firm believer in living within your means.

That being said, I personally like to keep at least enough in my HSA to cover our annual deductible (at a minimum).  Ideally, I’d like to at least have our annual out of pocket maximum tucked away.  And I wouldn’t want our balance to get much larger than two years of annual out of pocket maximum in our HSA.

Here’s my reasoning (which may or may not fit with your circumstances or financial habits, but is offered up as one way to look at things):

Deductible at a Minimum

With our family, there is a pretty solid possibility that at least one of us will meet our deductible in any given year.    I think every person, not just families with kids, should be prepared for that happening – because whether you have children or not, you never know what could happen on any given day.

So that we don’t have to worry about how we are going to pay for medical care at the same time we are worrying about whatever is causing the need for care – I like to have at least our deductible covered.  For us, that means our HSA should be at least $1,500.   This may not cover all expenses should something (like a broken arm) occur, but it will get 75% of one person’s maximum at least.  Assuming only one  person gets hurt in any given year, this minimizes the amount we would have to find.

Annual Out of Pocket Maximum

Ideally, I like to have our Out of Pocket max saved.  Our plan has an annual out of pocket max of $2,000 per individual and $4,000 per family.  Having the family out of pocket maximum saved in our HSA allows us the comfort of knowing that we are covered if one person is ill or injured, but also covered in the less likely circumstance of two or more of our family members needing care.  If we have this much tucked away, we are certain we don’t have to stress at all about medical bills in a tragic year.  For that year anyway.

Should someone get hurt or ill near the end of the year – say, the day after Christmas – then it’s likely their medical needs will carry into the following year. Meaning that you’ll have to meet the deductible and possibly the out of pocket 2 years in a row.    Thankfully, this is also the same time of year that my work provides bonuses, so refilling the HSA can usually be done.  It’s not a fun way to spend money, but at least it’s possible.  This happened to us.  That bill up there?  It is just for the 2010 care.  Another is coming for 2011.

Can you save too much?

Although we just encountered the circumstances where we would want two years of an individual out of pocket max saved, I think that is plenty.  I would not want our balance to exceed double the annual family out of pocket max.

Why?

You are receiving a tax break on these funds equal to whatever tax bracket you are in; however, you are not generating any income on it once it’s in your HSA.  It is just sitting there.   There are other avenues for saving (IRA’s for example) that give you the same tax breaks, but you can earn money on the deposits also.  Once your piece of mind is covered (whatever $ amount that means to you), alternatives should be considered for your savings.  HSA’s are not an investing mechanism.  So, while most people are concerned about having a minimum saved, you should be aware of the maximum that makes sense also.

Do you have an HSA?  If so, what are your target minimum, ideal and maximum balances?

Daria is a working mom trying to have it all and writing about it on Mom in Management – leadership and career development, children and parenting, marriage, contributing to your community, and above all, staying sane on the roller coaster of life.  She also writes about financial savvy and adding to your nest egg on Saving to be Rich.

2 comments

I’m glad you’ve got me thinking about this before our November deadline for health and other benefits decisions.

We usually look at our health expense for the last year and factor in anything we know will come up in the next year (braces, LASIK, for example) in an attempt to come up with the appropriate amount. We underestimate just a little.

Good advice, Daria!

Thanks Lori! I have an HSA which rolls over each year, so there isn’t any worry about putting too much in and not spending it like with an FSA (flexible spending account). I have one of those for daycare and always try to underfund it – hate the idea of giving them free money!

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