Health Saving Account (HSA)

This post is for knowledge sharing only. It is not intended to be investment or tax advice.

Health saving account (HSA) is another tax-free investment account that is even better than Roth IRA. HSA offers three tax advantages:

• The contribution is tax deductible.
• Investment grows tax-free.
• Finally, withdrawals for qualified medical expenses are also tax-free.

To fully utilizes the advantages, it is better to let the money stay and grow in HSA as long as possible. To achieve this,

• Do NOT use HSA money to cover the current medical expenses.
• Instead, save the receipts and ask for reimbursement in future year of withdrawal.

Remarks:

• HSA does NOT have any CA state tax benefits.
• Both HSA enrollees and their spouse are NOT eligible to contribute to the general flexible spending account (FSA).
• One can have a HSA and limited purpose FSA (LPFSA) at the same time. Unlike the general FSA, LPFSA can only cover vision and dental expenses.

High Deduction v.s. HSA Saving

To be eligible for HSA, one should be enrolled in a high deductible health plan (HDHP). Compared to typical health plans, HDHP requires enrollees to pay much more before the insurance starts to pay its portion. So it is usually said that do not select HDHP + HSA if expecting large medical expenses. 

However, even in case of large medical expenses, maxing out HSA may still be preferred, especially for high-income earners.

Let's run the calculation by a real example of Nvidia HSA plus plan (2024): for family coverage, the employee is allowed to contribute \$6,800 to HSA and the employer matches \$1,500. Therefore, assuming the marginal federal tax rate is 37% and the marginal CA state tax rate is 10%, by maxing out HSA, one is able to

• save $\$6,800*37\% = \$2,516$ from federal tax;
• receive $\$1,500 * 90\% = \$1,350$ from employer match (there is CA state tax on HSA employer match).

The total saving by maxing out HSA is \$3,866 while the family deductible of the plan is \$3,350. In other word, even there are large medical expenses meeting all the deductible, maxing out HSA can still save \$516 immediately in the current year, let alone the tax-free investment growth in HSA.

Note that there are also additional savings from health insurance premium since HDHP usually has lower premium:

• For the above Nvidia HSA plus plan (2024), the annual premium is \$1,968 for family coverage. 
• For a non-HSA plan like Nvidia PPO (2024), the annual premium for family coverage is as high as \$4,932. 

Given that premium is pre-tax, choosing Nvidia HSA plus plan over Nvidia PPO plan can bring home additional money of the amount $(\$4,932 - \$1,968) * (1 - 37\% - 10\%)\approx \$1,571$.