Health insurance is generally frowned upon in Islamic law due to gharar (uncertainty or gamble-like element). However, given its mandatory status in California, we can’t avoid it.
Consequently, many devout Muslims adopt a two-step approach:
- they acquire a minimal health insurance plan, which happens to be a legal eligibility requirement for HSAs anyway, (as explained below) and,
- save money for any unanticipated medical bills in HSA.
Clarification: As of 2023, there is currently no federal law or fine for not enrolling in health insurance. The federal government eliminated the fine in 2019. However, some states — including California — with individual mandates still have penalties for uninsured individuals. details here
What is Health Savings Account (HSA)?
A type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. Qualified? yes so you can’t usually pay premiums from this account. Yes, you can pay other medical expenses such as deductibles, copayments, coinsurance, over the counter medications, menstrual products etc.
Alternative or complement to insurance?
Can HSA be an alternative to health insurance? What if i just save money and get rid of my insurance if my state allows me to? Imagine if instead of paying premiums, I’m saving monthly money in this account.
Not possible. HSA is a complement NOT an alternative to health insurance. Why? bcs you can only open an HSA IF you’re already enrolled in a high-deductible health plan (HDHP) (meaning where you pay lower monthly premiums but then pay more out of pocket. (Deductible=amount you (policyholder) have to pay before insurance pays).
Pros of HSA:
- pre-incometax: saved money is not included in your gross income and so is not subject to federal income taxes. (Taxes are big thing bcs it’s taxes not your rent that is the biggest expense most middle class families bear.) In most states, it is not subject to state income taxes. BUT NOT CALIFORNIA. if you’re in california, you still pay state tax on HSA. :(
- others too: people other than you can contribute to HSA as well, such as your employer, relatives friends etc
- many expenses qualify: but not premiums, remember?
- tax-free withdrawals: as long as for qualified medical expenses
- investable: don’t let the balance jsut sit there, invest in liquid assets such as stocks etc. cuz (next point) earnings will be tax free too.c
- Tax-Free Earnings; (above)
- Annual Rollover: money unspent rolls over to the next year. Of course it should roll over, it’s my money! whats the big deal? No. Don’t take it for granted. If you instead had Flexible Spending Account (FSA), then the leftover money that you didn’t spend is forfeited (read: eaten up by your employer, insurance company or third-party administrator (TPA) which could be a financial institution. Bcs of a cruel “use-it-or-lose-it” provision in the FSA contract. (In our case study, the party administering my hsa is not my employer or my insurance company Cigna, rather its hsabank which is a division of Webster Bank.)
- Portability: changing health insurance plans, job, employer, or retiring doesn’t impact HSA. Money remains yours.
- Convenience Most HSAs issue a debit card that you can use to pay inperson or online medical bills.
Cons of HSA:
- high-deductible requirement: If you want low-deductible, meaning you want to be in an insurance plan where you pay higher premiums so you can pay less out of pocket oon medical visits, then it’s not possible. So you can’t have it all, which makes sense.
- still state-taxed: as explained above.
- Taxes and Penalties: If you withdraw funds for non-qualified expenses before you turn age 65, you’ll owe income taxes on the money plus a 20% penalty. Once you’re 65, you’ll owe taxes but not the penalty.
- Recordkeeping: must keep receipts to prove that your withdrawals were used for qualified health expenses.
- Fees: Some HSAs charge a monthly maintenance or a per-transaction fees, that may be waived if you maintain a certain minimum balance.
Obviously, pros outweigh the cons. So I’m in.
Two ways of contributing to HSA:
- pre-tax payroll deduction: thats teh default. A set amount is deducted from your payroll. BUT if its below maximum contribution allowed, you can also contribute more from:
- after-tax contribution.
Example: Max allowed contribution is $3,850 in 2023, but only $2,600 were deducted from your payroll by the end of 2022, you may choose to deposit an additional $1,050 to further lower your tax liability.
Juicy after-thoughts:
If its tax free, can i just use this account to save money for other purposes, i mean, saving money for college or house etc.?
No. yes for home only if you want to buy a house after you turn 65. Cuz until you turn 65, HSA savings can only be used for medical expenses.
My grandpa is 60 and has an HSA. What if I start saving my money in his HSA for my college or car or house?
Maybe. But they’re smarter than you. Savings is capped. For example, if you’re an individual under the age of 55, your maximum allowed contribution for the entire year is $3,850 in 2023. You cannot just contributing large amounts of money, the way you do when you’re saving up for a house.
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Eager for more?
See part 2 for the HSA contract and its sharia compliance.
