HSAs make health care more affordable

A health savings account is a tax-advantaged account designed to help cover your out-of-pocket health care expenses. If you’re the account owner, your spouse and dependents can also use the HSA, even if they’re not covered by your health plan. In 2022, you can contribute up to $3,650 if you have individual health insurance or up to $7,300 if you have family coverage. If you’ll be age 55 or older at the end of the year, you can contribute an additional $1,000 in “catch-up” contributions.

More than 80% of large employers now 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. Monthly premiums for a high-deductible plan are generally lower, but you’ll pay more out of pocket before your insurance coverage kicks in. For 2022, the health plan must have a deductible of at least $1,400 for individual coverage or family coverage.

The health plan must also have a limit on the out-of-pocket medical expenses you must pay. Out-of-pocket expenses include deductibles, copays and other amounts, but do not include premiums. For 2022, the out-of-pocket limit for individual coverage is $7,050; it’s $14,100 for family coverage. According to the IRS, only the health plan’s in-network deductibles and expenses should be used to determine if the limit applies.

The benefits

There are three tax advantages to HSAs: You can contribute to them on a pre-tax basis, your savings will grow tax-free over time, and withdrawals are tax-free as long as they’re used for qualified medical expenses.

HSAs also offer a lot of flexibility. Unlike a health care flexible 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 more benefit from an HSA if you use other cash to pay current medical bills and allow the funds in the account to grow. Many HSA plans allow you to invest all or a portion of your contributions in mutual funds, offering the potential for greater long-term growth than if you put all your contributions in 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 deductible and invest the rest in mutual funds for longer-term spending.

Generally, account holders who contribute to HSAs through payroll deduction make regular, fixed contributions throughout the year. However, you can 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 getting married or divorced, in order to make a change during the plan year.

HSAs give you an unlimited amount of time after paying medical expenses to reimburse yourself. If you’re paying medical expenses out of pocket instead of touching the tab, save the receipts, because you can repay those expenses with funds from your HSA at any time, even years after the expense was incurred. In the meantime, your funds will grow tax-free.

hidden features

“HSAs help prepare for future health and wealth needs,” says Patricia Graves, knowledge advisor for the Society for Human Resource Management (SHRM). This is particularly true for retirees. You can’t contribute to an HSA once you’re enrolled in Medicare (at least under current law; there’s legislation pending in Congress that could change that). But after you sign up for Medicare, you can still use the funds tax-free for medical expenses. (After age 65, you can withdraw money for nonmedical expenses without paying a 20% penalty, but you’ll pay taxes on those withdrawals.) And the list of eligible expenses is long. Along with deductibles, copays, and other medical costs not covered by insurance, you can use the money for vision care, dental costs, and hearing aids. HSA dollars can also pay a portion of long-term care insurance premiums at various limits, depending on the account owner’s age.

HSAs can also help cover the cost of essential travel for medical care. If you have to travel out of state for a specific medical procedure, for example, you can use your HSA funds to cover the cost of a flight or train, or to pay for gas, parking fees and tolls if you drive.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted in 2020 in response to the pandemic expanded the types of eligible expenses for HSAs, 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 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 expenses for HSA funds.

Select a plan

Some companies encourage employees to enroll in high-deductible plans by offering HSA matching 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 enroll in a high-deductible plan, you can open one on your own with a financial institution that offers HSAs. You may also choose to shop around if your employer’s plan includes high fees or lackluster investment options. (You can compare plans at HSAsearch.com.) But you may sacrifice some benefits if you choose that path, says Rich Ward, managing director and head of health solutions at TIAA, an HSA provider. Using an HSA outside of your employer’s offer may mean giving up the convenience of having pre-tax contributions deducted from your paycheck, he says. Also, you may not be eligible for matching contributions if you choose an HSA not offered by your employer.

If you have an HSA through an employer-sponsored plan and lose your job, the account is yours and you can still use the funds at any time, tax-free, for qualified medical expenses. Although health insurance premiums are generally not considered qualified medical expenses, there is an exception if you use withdrawals to pay premiums for COBRA coverage (which allows you to continue employer-based insurance for up to 18 months after you leave your job). ) or to pay other health insurance premiums if you are collecting unemployment benefits.

new limits

Due to recent increases in the cost of living, HSA contribution limits will increase significantly for 2023. The annual contribution limit for individual coverage will increase from $3,650 to $3,850, and if you have family coverage, the limit will increase from $7,300 to $7750. Catch-up contributions for account holders age 55 and older will be $1,000, the same as in 2022.

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