Many today, if not most, have a High-deductible Health Insurance Plan. A high-deductible plan has a deductible that generally ranges from as low as $1,300 for individual coverage to upwards of $2,600 for family coverage, depending on the plan. With such high deductible amounts, the Health Savings Account (HSA) can provide you with a great way to save money for today’s medical expenses and has the added benefit of allowing you to save and invest for your future medical expenses in retirement as well.
Before we share more about the HSA account, let’s talk about an account most are more familiar with, the Flexible Spending Account (FSA). People often confuse the HSA with the FSA and many just don’t realize the big difference. One of the big differences occurs at year-end.
HSA – you can carry-over your balance into the next and future years. “Shoebox” the receipts for your qualified medical expenses and “pay yourself back” for them from your HSA at any time.
FSA – you cannot carry-over your balance into the next or future years. In fact, if you don’t use it, you lose it!
We share the above distinction because it is such an important difference. We hope you have this straight now so that you may read on and find out just how awesome the HSA can be.
High-Deductible Plans and HSAs
High-deductible Health Plans (HDHPs) are designed to drive down health care costs by placing more of the responsibility and cost burden on consumers, in effect, forcing them to be more cost conscious when deciding on medical care. Like traditional health care plans, HDHPs usually cover a wide range of medical and prescription costs — but only after a steep annual deductible has been paid. Such deductibles generally run from as low as $1,300 for individual coverage to upwards of $2,600 for family coverage, depending on the plan.
HDHPs are often used with Health Savings Accounts (HSAs) — tax-preferred savings accounts that are used to fund qualified medical expenses. Employees and/or their employers make tax-free contributions to an HSA, then the employees use the funds to purchase medical care until they reach their deductibles.
HSAs and Employee Eligibility
You are eligible for an HSA if you meet four qualifying criteria:
- you are enrolled in a qualified HDHP
- you are not covered by another disqualifying health plan (whether insurance or an uninsured health plan)
- you are not eligible for Medicare benefits
- you are not a dependent of another person for tax purposes
Tax Advantages of the HSA
Pretax contributions: Contributions to your HSA can be made with pretax dollars.
Tax-free gains: Any gains on the money in your HSA are tax-free, so, you keep 100% of any money your HSA savings or investments earn.
Tax-free withdrawals: For qualified medical expenses, you won’t pay taxes on money you withdraw.
How do I know what qualified medical expenses are?
The IRS has publications that detail the HSA and these expenses. It’s within IRS Publication 502 and 969. You can also find examples of qualified medical expenses at https://healthsavings.com/hsa/what-is-covered-by-an-hsa/.
How is an HSA like a “shadow 401(k)”?
- Tax Deductible Savings: You can save and invest pretax dollars in an HSA account and get a tax-deduction for the dollars you save.
- Long-term Savings & Investment Options: Your excess dollars, meaning those you do not spend on qualified medical expenses, can accumulate for many years. While you accumulate, the HSA most often has options for investing your dollars for the longer term as well, typically in a savings account or mutual fund choices.
We see one of the real benefits long-term of the HSA a tax-advantaged way to save for your future medical expenses during retirement. Keep in mind that one of the big differences from a 401(k) account is if you use the HSA funds for qualified medical expenses, you don’t pay tax.
Important to Know…
With an HSA, funds are available anytime for qualified medical expenses, but if used for other reasons a 20% penalty tax applies until you reach age 65. After 65 no penalty tax applies on withdrawals regardless of what they are used for.
What is the maximum amount I can contribute to an HSA account in any year?
While contribution limits may change from year to year, in 2017, the maximum contribution for individuals is $3,400 and for a family it is $6,750. However, if you are age 55 or older, there is a “catch-up” provision allowing for an additional $1,000 contribution.
If you don’t yet have an HSA account through your employer, it is possible to open one on your own if your current health insurance meets the criteria we’ve outlined above. More questions? Let us know at firstname.lastname@example.org.
Important Note: The views expressed in this post are as of the date of the posting and are subject to change based on market and other conditions. This post contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and should not be taken to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants or attorneys regarding your individual circumstances and needs. No advice may be rendered by Lenity Financial, Inc. unless a client service agreement is in place.
- Optum, Inc. 6th Annual Wellness in the WorkplaceStudy, July 2015.
- Financial Planning Association