If you have a high-deductible health insurance plan, you should know about health savings account benefits.
With high-deductible health plans (HDHP), you pay less in premiums each month, but you may pay more out of pocket for healthcare expenses each year. But what if there's not enough in your pocket to pay for the care you and your family need?
A health savings account (HSA) is a special kind of savings account designed for putting money aside for medical expenses. Contributing to an HSA can help ensure that you'll be able to pay for healthcare when you need it.
Up to one-third of people who are eligible to open an HSA don't have one, and many who do have an account don't contribute money to it. This can be a big mistake. An HSA can help you avoid going into debt to pay for medical expenses.
Here are some answers to commonly asked questions about HSAs.
Who can open an HSA?
Most people who have an HDHP can open an HSA. For 2022, an HDHP is defined as having a deductible of $1,400 or more for an individual or $2,800 or more for a family. These plans pay for only certain preventive services before you reach your deductible. When you're shopping on the HealthCare.gov Marketplace, look for the words "HSA-eligible." If you're buying your plan through your employer, be sure to ask if the plan meets the government definition of HSA-eligible.
You cannot contribute to an HSA if you're enrolled in Medicare. However, you can continue to use the money in an HSA to help pay for healthcare expenses.
What are the advantages of an HSA?
If you have an HDHP, you want to be ready for out-of-pocket expenses, including your deductible, co-payments (fixed amounts charged for covered healthcare services) or co-insurance (a percentage of covered healthcare costs). Those costs can add up, especially if you contract a serious illness that requires complex care. The main advantage of an HSA is that it provides a way to put aside money so you're prepared to pay for care when you need it.
Another advantage of HSAs is that the amount you contribute to your HSA is tax-deductible, which means it gets subtracted from your income when you file your taxes. Individuals under age 55 can contribute up to $3,650 to an HSA. If you are over 55, you can contribute $4,650. If your high-deductible plan covers your whole family, you can contribute up to $7,300, which can lower your taxes significantly. Additionally, the money is not taxed when you withdraw it for qualified medical expenses.
If you don't need the money for healthcare costs, it stays in your account and has the potential to grow. If you are over 65, you can withdraw money from an HSA for any reason and not pay taxes on it.
Do HSA savings expire?
There is no expiration date on HSA savings. If you don't use all of the money you put aside one year, it stays in your account until you need it. If you change jobs, your HSA funds go with you.
What can I pay for with an HSA?
You can use the money from an HSA to pay for qualified medical expenses, including co-payments, co-insurance and certain other medical expenses. These expenses may include ambulance costs, hearing aids, prescription drugs, mental health care and qualified long-term care. You can even use your HSA account to pay for qualified medical expenses for a spouse or dependent as long as those expenses are not otherwise reimbursed. You cannot use money from an HSA to pay your health insurance premiums.
If you are over 65, you can use HSA funds for any expense.
How do I make sure I make the most of my HSA?
If you can afford it, you'll get the most out of your HSA if you contribute the maximum amount each year. This would give you a tax advantage now and allow the money to grow over time. Depending on how your account is set up, your contribution may be deducted from your paycheck or transferred from your bank account.
If fully funding your account isn't possible, contribute at least as much as you expect you'll need to cover your medical expenses. Of course, you can't predict the future, but you can make an estimate by looking at the previous year's costs and anticipating future costs. If your doctor has recommended a procedure or you are planning to get pregnant or adopt a child, your healthcare costs are likely to increase from the prior year. To figure out how much a procedure will cost, you can ask your doctor for an estimate and check with your insurance company to see how much they will cover.
Make sure you keep all of your receipts so you can show that you used your HSA money for qualified costs in the event of a tax audit.
How can I set up an account?
Many banks and other financial institutions offer HSA accounts. Some insurance companies offer an HSA through a partnership. Before you set up your account, compare different offerings. Some HSAs charge fees for opening, closing or even keeping the account active. Others offer convenient services, such as online banking or a debit card for paying qualified expenses. Some offer a standard FDIC-insured bank account, while others allow you to invest all or some of the money in a mutual fund, certificate of deposit or other option. If you choose to invest part of the money, make sure you understand the risks.
If you have an HDHP, HSAs can be a very good investment for both your financial health and your overall health.