HSAs make healthcare affordable
health savings account It is a premium tax account designed to help cover out-of-pocket health care expenses. If you’re the account holder, your spouse and other dependents may also use the HSA, even if it’s not covered by your medical plan. 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 are 55 or older at the end of the year, you can put in 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 qualifies to contribute to an HSA. In order to participate, your health insurance plan must offer a high-deductible plan. The monthly premiums for a high deductible plan are usually lower, but you’ll pay more out of pocket before insurance coverage begins. For 2022, a health plan must have a deductible of at least $1,400 for self-cover only or $2,800 for family coverage.
The health plan must also have a limit on the medical expenses you are required to pay out of pocket. Out-of-pocket expenses include deductions, co-payments, and other amounts, but do not include premiums. For 2022, the maximum self-cover only is $7,050; It’s $14,100 for family coverage. According to the IRS, only deductions and expenses for services within a health care plan’s network should be used to determine if the limit applies.
The tax benefits of HSAs are threefold: 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 great deal of flexibility. Unlike the Healthcare Flexible Spending Account, the HSA account is not a “use it or lose it” account – the money won’t be gone if you don’t use it by the end of the year. In fact, you will get more interest from your HSA account if you use other money to pay your existing medical bills out of pocket and allow the money in the account to grow. Many HSA plans allow you to invest all or part of your contributions in mutual funds, and this offers the potential for more long-term growth than you would if you put all of your contributions into a money market fund or savings account. One strategy is to invest enough money in a low-risk account to cover your current year’s health insurance and invest the rest in mutual funds to cover long-term expenses.
Typically, account holders who contribute to HSA through deductions from their payroll make regular, consistent contributions throughout the year. However, you are allowed to change the contribution amounts as long as they do not exceed the maximum contribution limits. This flexibility distinguishes HSAs from flexible spending accounts and health insurance policies, which require you to experience an IRS-qualifying event, such as a marriage or divorce, in order to make a change during the year of the plan.
HSAs give you an unlimited amount of time after paying medical expenses to make up for yourself. If you’re paying medical expenses with cash instead of tapping the account, keep the receipts, because you can recoup those expenses with HSA money at any time — even years after you incurred the expenses. In the meantime, your money will grow, tax free.
“HSA accounts help prepare for future health and wealth needs,” says Patricia Greaves, a knowledge advisor for the Society for Human Resource Management (SHRM). This is especially true for retirees. You cannot contribute to an HSA once you sign up for Medicare (at least according to current law; there is pending legislation in Congress that might change that). But after you sign up for Medicare, you can still use the tax-free money for medical expenses. (After age 65, you can withdraw money for nonmedical expenses without having to pay a 20% penalty, but you’ll pay taxes on those withdrawals.) Ideally, you should use the money to cover health care costs, which can be significant in retirement. The list of accrued expenses is long. Besides deductibles, co-pays, and other medical costs that aren’t covered by insurance, you can use the money for vision care, dental costs, and hearing aids. HSA dollars can also pay a portion of the premiums for long-term care insurance with different limits, depending on the age of the account holder.
HSAs can also help cover the travel costs necessary for medical care. If you have to travel outside of your state for a certain medical procedure, for example, you can use the money from your HSA to cover the cost of a flight or train, or to pay fuel surcharges, parking fees, and traffic fees if you’re driving.
The Coronavirus Aid, Relief, and Economic Security Act (CARES) enacted in 2020 in response to the pandemic has expanded the types of expenses eligible for an HSA, and these changes are permanent. Over-the-counter medications purchased on or after January 1, 2020 are now eligible for an over-the-counter HSA. They include pain relievers, cough suppressants, antihistamines, and other medications that treat problems from heartburn to acne. The law also added feminine hygiene products to the list of eligible expenditures for HSA money.
Choose a plan
Some companies encourage employees to sign up for plans with high deductibles by offering matching HSA contributions. The average employer contribution was $867 in 2021, according to Devenir, an HSA consulting firm. Not all employers offer HSAs, but as long as you sign up for a high-deductible plan, you can open one on your own with a financial institution that provides HSAs. You can also choose to shop if your employer plan includes high fees or modest investment options. (You can compare plans at HSAsearch.com.) But you can sacrifice some perks if you choose this path, says Rich Ward, MD, president of Health Solutions at TIAA, an HSA provider. Using an HSA outside of your employer’s offer could mean giving up the convenience of deducting pre-tax contributions from your paycheck, he says. Additionally, you may not be eligible for matching contributions if you choose an HSA that your employer does not provide.
If you had an HSA account through an employer-sponsored plan and lost your job, the account belongs to you, and you can still use the money at any time, tax-free, for eligible medical expenses. Although health insurance premiums are not usually considered eligible medical expenses, there is an exception if you use withdrawals to pay premiums for COBRA coverage (which allows you to continue with your employer insurance for up to 18 months after leaving your job) or to pay other costs Health insurance premiums if you collect unemployment benefits.
Due to recent cost-of-living increases, the HSA contribution limits will increase significantly for 2023. The annual contribution limit for self-cover only will increase from $3,650 to $3,850, and if you have family coverage, the limit will jump from $7,300 to $7,750. . Intraday contributions for account holders 55 years of age or older will be $1,000, as in 2022.