Understanding Health Care Savings Accounts
A health savings account (HSA) is a savings account that lets people set aside money on a pre-tax basis to pay for qualified medical expenses. An HSA is complementary to a health care plan that has a high deductible. People can save money in an HSA before taxes and use the funds to pay for eligible health care expenses, including expenses the health plan does not cover. For example, people can use their HSA savings to cover health care costs until reaching the plan’s deductible.
People can use their HSA funds to pay the copayment until reaching the out-of-pocket limit. Taxes do not apply to the money put into an HSA. Patients can invest a portion of the money in an HSA if maintaining a balance of $1,000 or more. For this reason, many people use part of their HSA to save for retirement.
HSAs offer several benefits. People can withdraw money to pay for procedures, deductibles, copayments, or other medical expenses. Any money left in the account at the end of the year will roll over into the next year. Even if a person’s health care coverage changes due to a change in jobs, as long as they continue with a high-deductible plan, funds in the account continue to grow, tax-free. If a person changes jobs, they can enroll in a new healthcare plan and maintain access to their existing HSA, even if the new healthcare plan does not qualify. Additionally, most people can use a debit card or checks to access their funds easily.
HSAs also have some disadvantages that people should consider. One of the biggest downsides to an HSA involves the requirement to have a health insurance plan with a high deductible. Although this coverage offers lower premiums, high deductibles often become hard to come up with if facing a significant medical issue. With increasing costs of health care premiums and deductibles, it may be challenging to add more money to one’s health savings account. Some people with high deductibles hesitate to see the doctor to seek treatment due to the high costs. They may feel as if they must keep the money in their HSA to save for retirement — thus putting off important medical care.
For people with HSA-eligible health insurance plans with a high deductible, an HSA plan can offer many benefits. With tax advantages and the ability to save for retirement, an HSA account offers long-term growth potential. It is an excellent way to save on health and dental costs through retirement.
Yes. People can open and contribute to as many HSA accounts as desired. Annual IRS contribution limits may still apply to the total amount contributed to HSA accounts. For people with an HSA through their employer, contributions made by the employer count toward the limit.
Yes. The HSA holder, spouse, and eligible dependents can all use the HSA money for qualified medical expenses. This can happen as long as everyone meets the eligibility requirements, and the account owner has authorized each of them by requesting an additional HSA debit card in their name.
The IRS has defined some eligibility requirements to qualify for an HSA. Eligible participants must have health insurance under a qualifying high-deductible health plan (HDHP), no other health coverage, no enrollment in Medicare, Tricare, or Tricare for Life. In addition, they cannot be claimed as dependent on someone else’s taxes, not receive veteran’s benefits within the last three months, and not have a health care flexible spending account (FSA) or health reimbursement account (HRA). These requirements may be subject to change.
Though similar, HSAs and FSAs have some differences. The most significant difference between the two is that not everyone qualifies for an HSA. Only those with a high deductible qualify. FSA remains available to anyone, regardless of their deductible. The max contributions differ for the two accounts. HSAs typically have higher max annual contributions. One of the biggest benefits of an HSA is that it allows any remaining balance to roll over to the next year.
HSA withdrawals are only tax-free when spent on qualifying medical expenses. These include out-of-pocket expenses for doctor visits, medical procedures, co-pays, dental costs, vision care, medications, and feminine hygiene products. The expenses can be for the individual, a spouse, or a dependent.
Each year, the IRS sets a limit on the amount of money someone can contribute to an HSA. For 2021, the limit for an individual is $3,600, and for a family, it is $7,200. Individuals over the age of 55 can contribute an additional $1,000 each year as a catch-up contribution.
To qualify for an HSA, an individual must be participating in a high-deductible health plan. With these, the individual is responsible for paying a certain amount before the health insurance company steps in and starts covering expenses. The deductible needs to be at least $1,400 for an individual plan or $2,800 for a family plan.
There is a penalty when using an HSA to pay for things that are not qualifying medical expenses. First, you have to pay taxes on that money as it now counts as income. Next, if you are younger than 65, you are charged another 20% penalty on the funds. To avoid this, do not withdraw HSA funds for non-medical expenses.
Some employers also make contributions to their staff's HSA plans. If your job contributes to your HSA, be sure that you do not go over the IRS contribution limit. Excess contributions will result in a 6% tax penalty.