A health savings account is a tax-advantaged account designed to help cover healthcare costs. If you are the account holder, your spouse and dependents can also use the HSA, even if they are not covered by your medical insurance. In 2022, you can contribute up to $3,650 if you have individual health insurance or up to $7,300 for family coverage. If you’ll be 55 or older at the end of the year, you can make an additional $1,000 in “catch-up” contributions.
More than 80% of large employers currently offer an HSA to their employees, according to a recent survey by benefits consultant Willis Towers Watson, but not everyone is eligible to contribute to an HSA. To participate, your health insurance plan must offer a high-deductible plan. Typically, the monthly premiums for a high-deductible plan are lower, but you’ll pay more out of pocket before the insurance coverage kicks in. For 2022, the health plan must have a deductible of at least $1,400 for personal coverage or $2,800 for family coverage.
The health plan must also have a limit on the medical expenses you are required to pay. Reimbursable expenses include deductibles, co-payments and other amounts, but do not include premiums. For 2022, the out-of-pocket cap for personal coverage is $7,050; it’s $14,100 for family coverage. According to the IRS, only deductibles and expenses for services within the health plan’s network should be used to determine whether the limit applies.
The tax advantages of HSAs are three-fold: you can contribute to them on a pre-tax basis, your savings will grow over time tax-free, and withdrawals are tax-free as long as they are used to cover eligible medical expenses. .
HSAs also offer a lot of flexibility. Unlike a flexible healthcare spending account, an HSA is not a “use it or lose it” account – the funds won’t disappear if you don’t use them by the end of the year. In fact, you’ll get a greater benefit from an HSA if you use other cash to pay current medical expenses and allow account funds to grow. Many HSA plans allow you to invest all or part of your contributions in mutual funds, which offers the potential for longer-term growth than you would get if you put all of your contributions in a mutual fund. money market or savings account. One strategy is to invest enough money in a low-risk account to cover your current year’s health insurance deductible and invest the rest in mutual funds for longer-term expenses.
Typically, account holders who contribute to HSAs through payroll deductions make regular, fixed contributions throughout the year. However, you are allowed to change the contribution amounts as long as they do not exceed the contribution limits. This flexibility distinguishes HSAs from flexible spending accounts and health insurance policies, which require you to experience an IRS-eligible event, such as getting married or divorced, in order to make a change during the year. plan.
HSAs give you unlimited time after paying medical expenses to reimburse you. If you pay medical expenses in cash rather than using the account, keep the receipts because you can reimburse those expenses with funds from your HSA at any time, even years after you incur the expenses. In the meantime, your funds will grow, tax-free.
“HSAs help prepare for future health and wealth needs,” says Patricia Graves, knowledge advisor for the Society for Human Resource Management (SHRM). This is especially true for retirees. You cannot contribute to an HSA once you enroll in Medicare (at least under current law; there is pending legislation in Congress that could change that). But after you enroll in Medicare, you can still use the funds tax-free for medical expenses. (After age 65, you can withdraw money for non-medical expenses without having to pay a 20% penalty, but you will pay taxes on those withdrawals.) Ideally, you should use the money for healthcare costs health, which can be important in retirement. And the list of eligible expenses is long. In addition to deductibles, co-payments, and other medical expenses not covered by insurance, you can use the money for vision care, dental expenses, and hearing aids. HSA dollars can also pay a portion of long-term care insurance premiums at various limits, depending on the age of the account holder.
HSAs can also help cover essential travel costs for medical care. If you need to travel out of state for a specific medical procedure, for example, you can use funds from your HSA to cover the cost of a flight or train, or to pay for gas, parking fees and tolls if you drive.
The CARES (Coronavirus Aid, Relief and Economic Security) Act enacted in 2020 in response to the pandemic expanded the types of expenses eligible for HSA, and these changes are permanent. Over-the-counter medications purchased on or after January 1, 2020 are now eligible for HSA without a prescription. These include painkillers, cough suppressants, antihistamines, and other medications that treat conditions ranging from heartburn to acne. The law also added feminine hygiene products to the list of expenses eligible for HSA funds.
Selecting a package
Some companies encourage employees to enroll in high-deductible plans by offering matching HSA contributions. The average employer contribution was $867 in 2021, according to Becoming, an HSA consulting firm. Not all employers offer HSAs, but as long as you have a high-deductible plan, you can open one yourself with a financial institution that provides HSAs. You may also choose to shop around if your employer’s plan has high fees or poor investment options. (You can compare plans at HSAsearch.com.) But you may sacrifice some benefits if you go this route, says Rich Ward, general manager and head of health solutions at TIAA, an HSA provider. Using an HSA outside of your employer’s offer can mean forgoing the convenience of having pretax contributions deducted from your paycheck, he says. Also, you may not be eligible for matching contributions if you choose an HSA that is not offered by your employer.
If you have an HSA through an employer-sponsored plan and you lose your job, the account is yours and you can still use the funds anytime, tax-free, for eligible medical expenses. . Although health insurance premiums are generally not considered eligible medical expenses, there is an exception if you use withdrawals to pay premiums for COBRA coverage (which allows you to continue insuring your employer until 18 months after leaving your job) or to pay other health insurance premiums if you are receiving unemployment benefits.
Due to recent increases in the cost of living, HSA contribution limits will increase significantly for 2023. The annual contribution limit for personal coverage will increase from $3,650 to $3,850, and if you have family coverage, the limit will increase from $7,300 to $7,750. Catch-up contributions for account holders age 55 or older will be $1,000, as in 2022.