It’s open enrollment season, meaning it is time to select your health insurance plan. That implies it’s also the time of the year when our clients will ask us about Health Savings Accounts (HSAs).
This article provides a quick overview so you can determine whether an HSA plan makes sense for you. And, don’t get these confused with FSAs (Flexible Spending Accounts) as they’re not the same thing!
What is a Health Savings Account (HSA)?
In many ways, you can think of an HSA as the 401(k) for medical expenses. HSAs have significant tax advantages, even compared to 401(k) plans, but are limited with how the money can be spent.
Contributions to an HSA are made tax-free (meaning you can deduct the contribution amount from your income this year to save you on taxes). The contributions can then be invested, with any gains again accruing tax-free. And, as long as the distributions are used for “qualified medical expenses”, then there is no tax when the funds are withdrawn either. You read that right – income set aside in an HSA is never taxed so long as the funds are eventually spent on medical expenses.
However, not everyone is eligible to contribute, so there are tradeoffs that need to be determined.
Who is eligible to contribute to an HSA?
To be eligible to contribute to an Health Savings Account (HSA), you must be enrolled in a high deductible health plan (HDHP).
First off, if you get your insurance through your employer, be advised that not every company offers a high deductible plan, so this might not be an option for you.
High deductible health plans are exactly as they sound. In exchange for lower monthly premiums, the plan comes with a high deductible, which is the amount that you must cover out-of-pocket before your insurance coverage kicks in. The minimum deductible amount to qualify as an HDHP is set each year by the IRS, which for both 2018 and 2019 is $1,350 if only insuring yourself and $2,700 if insuring more than one person. The plan must also have maximum out-of-pocket expenses (which includes items such as deductibles, co-payments, and coinsurance) of no more than $6,750 (or $13,500 for family plans) to qualify under the IRS’s 2019 definition of an HDHP, a slight increase from 2018’s thresholds.
For those who are healthy and don’t expect to incur meaningful medical expenses, a high deductible plan might be a good option.
How much can be contributed to an HSA?
As a result of choosing a high deductible plan, you’re now eligible to make contributions to an HSA. Your employer might offer to make contributions to your HSA as well, since they too save on the lower premiums.
For 2018, your contribution for the year is capped at $3,450 (or $6,900 if your plan covers more than one person). Note that if your employer contributes, then this amount counts toward the maximum, since your combined contributions cannot exceed the limit.
For 2019, the HSA contribution limit increased slightly to $3,500 (or $7,000 for family plans).
Individuals over the age of 55 are eligible to contribute an extra $1,000 per year (in both 2018 and 2019), referred to as catch-up contributions.
Where can an HSA account be opened?
The most common scenario is for an employer to sponsor an HSA plan as part of a high deductible plan option. Often, this option comes with an employer contribution as well.
However, you can also access an HSA through many investment brokerage firms, such as Fidelity. This option is most relevant to freelancers.
For healthy individuals, partnering a high deductible insurance plan with an HSA might be a financially savvy strategy. By lowering your monthly premiums and instead contributing those savings into an HSA, you can build up funds for your longer-term medical expense needs.
The HSA account will grow tax free and can be used whenever needed for qualified medical expenses. This essentially can serve as a second retirement account, allowing you to allocate more of your 401(k) and IRA funds to non-medical related expenses.
If any of the above doesn’t make sense to you, get in touch with a Visor tax advisor for a free consultation.
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