New to a Health Savings Account? Here Are Your Assembly Instructions!

Health Savings Accounts usually don't come with the illustrated instructions that accompany electronics or the online videos that guide consumers on everything from changing a car's headlight to tattooing a friend. This set of clear instructions lets you know what you need to do to set up your account, sans the visual cues.

You're new to a Health Savings Account. You're not sure exactly what you need to do before Jan. 1. Perhaps you've received a guide already that shows you the benefits of these powerful financial accounts. But those pamphlets often don't list the simple steps that you need to take to set yourself up for instant and long-term financial success.

Here's your quick-start guide to a Health Savings Account:

Set Your Payroll Deduction

Don't worry - you can adjust your payroll deductions to fund your account throughout the year. You're not making a binding election, as you do with a Health FSA. That said, it's important to begin to fund your account with regular deposits that flow automatically to your Health Savings Account. Remember, the contribution is deducted from your pay before federal payroll and federal and state (except in California and New Jersey) income taxes are applied. For every $10 that you contribute, your net pay goes down by about $7. But the full $10 is deposited into your account.

Open Your Online Account

You may not be able to complete this step until the effective date of your medical coverage. Don't worry. Just be sure to follow the instructions to open the account and become familiar with the information included in the online account. You'll need to complete a few steps below through the online account as well.

Download the Mobile App

Go to your app store and download the mobile application for your account. If it's not there, that's a sign that your administrator doesn't offer the most current technology. That's something to note. You don't need a mobile device to manage your account, but the absence of a mobile app may be a symptom of a larger technology deficiency.

In most cases, you can manage your account on your mobile device. Many account owners appreciate mobile-app features that allow them to upload a distribution request, send a contribution, order additional debit cards, or point the phone camera to the UPC of any product in a store to see whether it's a qualified expense. A mobile device provides additional options and ensures that you have access to your account 24/7 - even when you're camping in the woods or traveling by plane, boat, bus, or car.

Name a Beneficiary

This is an important step. You want to make sure that your account balances goes to the right person or organization when you pass away. If you name your spouse, your balances can be transferred to your spouse without taxes or loss of value due to the transfer. If you name someone else, your Health Savings Account is liquidated and the funds are forwarded to your beneficiary. The balances will be included in the non-spouse beneficiary's taxable income.

Select Your Communication Options

You probably have the option to receive information - like monthly statements and annual tax documents - via e-mail rather than paper statements mailed to you. Your administrator may charge a fee to print and send paper statements. Be sure to opt into electronic receipt. If you want hard copy, go to your online account and print a copy of the monthly statement, which will be posted electronically.

Be sure to provide your e-mail address so that you're notified promptly when you need to take action.

Set up Direct Deposit

Your online account will have a place for you to insert the account and routing numbers of a personal financial account (like checking or savings). Be sure to provide this information. Your administrator will never pull funds without your permission. But it will send distribution requests to you electronically so that you receive your funds faster. And if you need to make a tax-deductible personal contribution after the end of the calendar year, you can do so easily without writing a check or using a stamp.

Consider Wiring a Small Contribution

Here's an important concept: You can't reimburse any qualified expenses tax-free before you establish your Health Savings Account. In most cases, you establish your account when you complete these three steps:

1. Signal an intent to open the account. You do this by completing an online or paper application, or choosing a medical plans whose enrollees' information is sent automatically to the account administration to set up accounts.
2. Name a beneficiary. See above.
3. Place corpus, or something of value, in the account.

That third action may be a barrier to prompt establishment.

Example: Your company's first 2022 payroll file, containing the employer contribution and your first pre-tax payroll deduction, are posted to your Health Savings Account on Jan. 14. In most cases, you can't reimburse any qualified expenses that you incurred before that date - even though you were enrolled on HSA-qualified coverage and may have incurred some qualified expenses already.

Here's the solution: Open your online account (above), set up direct deposit (above), and make a small transfer into your account Jan. 1. It doesn't have to be much; a few dollars is adequate. And you don't want it to be too much if your employer allows pre-tax payroll contributions through a Cafeteria Plan. Those deposits are pre-tax (before federal payroll and federal and state income taxes are applied). Your direct deposit, in contrast, is tax-deductible. You receive the tax benefit when you file your 2022 personal income tax return in early 2023. And you won't recapture the payroll taxes that were assessed on the money when you earned it.

Understand Your Investment Options and Process

If you're new to Health Savings Accounts, investing your balances probably isn't top-of-mind. Further, you probably face a minimum cash balance before you can place a portion of your balance in a portfolio of mutual funds. And even when you reach this threshold, you may feel more comfortable keeping a cash balance sufficient to cover your deductible.

But be sure to familiarize yourself with investment opportunities promptly so that you have sufficient knowledge when this option is right for you. Most account owners - about 90% - don't invest their balances in mutual funds, instead settling for interest rates that are typically 0.1%. To put that number in context, a $1,000 balance grows by $1after a year of 0.10% interest.

In contrast, general inflation is running at about 6% right now (medical inflation is typically higher than the general rise in prices). As your $1,000 balance grows to $1,001 after a year, medical inflation of, say, 8%, reduces your spending power to $920. But take solace - the figure is $921 with your interest added.

Even if you're not ready to invest, you want to understand the following:

• What's the minimum cash balance that I must maintain before I can begin to invest?
• What are my investment options?
• Which investments should I choose? If my goal is to have a balanced investment portfolio, should I seek that balance within the Health Savings Account itself, or am I comfortable with an unbalanced account if it's part of an overall investment portfolio (including retirement and non-retirement brokerage accounts) that's balanced?
• Does my account have a sweep option whereby I choose certain mutual funds and all future contributions above my minimum cash balance go directly into investments (effectively putting investing on auto-pilot)?

The Bottom Line

The future, like the past, belongs to those who recognize opportunity and seize it. You've set yourself apart by becoming eligible to fund a Health Savings Account. The battle is half-won already. But those who learn how to maximize this opportunity truly enjoy the spoils of victory.

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