If You Have the Opportunity, Start Investing in a Health Savings Account Today!
Health Savings Accounts (HSAs) are a tax-advantaged way to save money for certain medical or dependent-care expenses. An HSA is also a way to cover out-of-pocket medical expenses. Contributions are tax-deductible, funds grow without being taxed, and can be withdrawn at any time without penalty (when used for a qualified medical expense.) An HSA is also a great way to save for medical expenses in retirement because the money in the account can be invested so it can grow over time.
In order to contribute to an HSA, you must have a qualifying high-deductible health insurance plan.
Benefits of HSAs
The CARES Act has made the benefits of HSAs even better by allowing money from an HSA to pay more medical expenses. Some of the new benefits include:
Over-the-counter medications
Feminine-hygiene products
Telehealth (remote consultations via phone or video chat)
Testing and treatment related to COVID-19
Coronavirus vaccine (if one becomes available)
If you lose your job and had an HSA through an employer-sponsored plan, the account stays with you and the usage is the same: funds can be used anytime, tax-free, for qualified medical expenses. Withdrawals can be used to pay premiums for COBRA coverage, or other health insurance premiums if you are collecting unemployment.
Making the Most of an HSA
As you read above, there are a plethora of benefits of HSAs. Following are tips to help you maximize these benefits:
1. Know the maximum contribution
The maximum contribution changes each year (see below.) It is important to stay current so that you have the opportunity to contribute the maximum amount.
2. Contribute to your HSA even if there is not an immediate need
HSAs don’t expire and money that is put in an HSA but not used can be invested tax-free. This is why HSAs are considered to be a retirement savings tool. If you contribute the maximum amount each year, when you retire, there will likely be a significant amount of money saved to use for healthcare.
3. Make catchup contributions
If you are over age 55, you can contribute $1,000 more than your limit each year. See #2 for why this is important and helpful for retirement!
4. Stop contributing BEFORE you sign up for Medicare
If you are still making contributions to an HSA when you sign up for Medicare, you will be hit with a tax penalty. Medicare eligibility begins at age 65, and you have up until 3 months before your 65th birthday to contribute to your HSA without tax implications.
Of note, you can use HSA funds to pay for Medicare expenses like premiums, deductibles, and copays.
5. Withdrawals should be for qualifying medical expenses only (unless you’re 65 years or older)
If you are under 65 years of age and make a withdrawal for something other than a qualified medical expense, you will have to pay a 20% penalty. Additionally, the money you withdraw will also be taxed as ordinary income.
Qualified Medical Expenses
The following are the most common qualified medical expenses:
Prescription medications
Dental services
Eyecare
Ambulance services
Infertility care
Hearing aids
Acupuncture and chiropractic care
Click here for a complete list of deductible expenses from the IRS.
HSA Changes Expected for 2021
Each year, HSAs are slightly adjusted due to inflation. Changes expected in 2021 are:
Maximum contributions will increase slightly.
A covered individual will be able to set aside up to $3,600 ($3,580 in 2020.
A covered family will be able to set aside up to $7,200 ($7,100 in 2020.)
Requirements to be considered a high-deductible plan will slightly increase.
The maximum out-of-pocket amount for an individual will be $7,000 ($6,900 in 2020.)
The maximum out-of-pocket amount for a family will be $14,000 ($13,800 in 2020.)
Typically, the minimum deductible is adjusted. However, the minimum deductible will remain the same for 2021: $1,400 for individual and $2,800 for family policies.
Differences Between HSAs and FSAs
An FSA is a Flexible Spending Account, which is an account where employees can put money to be used for certain health care or dependent-care expenses. Different from an HSA, funds in an FSA have to be used by the end of the plan year. Some plans allow you to rollover up to $500 of the unused balance in an FSA to the plan for the following year.
Another difference is that an HSA is dependent on the type of insurance plan you have, and an FSA can be used with any insurance plan. Therefore, more employers make FSAs than HSAs available to employees.
Questions?
As you have read in this article, there are many benefits of HSAs, and we highly recommend that you take advantage of investing in one if your health insurance plan meets the requirements and you have the opportunity!
Should you have any questions about HSAs, please contact us!