What is a Health Savings Account? Health Savings Accounts are employer-sponsored health plans that were created by federal legislation in 2003. HSA’s are much like a savings account and are typically maintained and administered by banks or insurance companies.
They offer tax savings and can be beneficial to employees should they need to pay for medical expenses. An HSA will also cover a variety of health expenses that aren’t covered by traditional employee health insurance.
Your HSA contributions will reduce your taxable income, grow tax-deferred, and can be withdrawn tax-free as long as you use it for health-related expenses.
Who can establish an HSA?
Employees of an employer-sponsored plan can often select an HSA. Anyone who is self-employed can also select this type of plan. But it is important to understand that whether you are an employee or self-employed, you must be covered by a High Deductible Health Plan (HDHP) in order to establish an HSA.
An HDHP is a medical insurance plan that has a higher than average minimum deductible. To qualify as a high deductible health plan in 2020, the minimum deductible is $1,400 for individual coverage or $2,800 for a family plan.
Annual contribution limits
Every year the amount you can contribute to the HSA is revised, for 2019 and 2020 these are the limits:
- A single person can contribute up to $3,500 per year in 2019 and $3550 in 2020
- Family can contribute up to $7000 per year in 2019 and $7100 in 2020
The money goes into your HSA account tax-free if your employer will set-up paycheck deductions for you. If you are not having your employer doing payroll deductions for your contribution, then when you prepare your federal income taxes you will be able to take a deduction for the money you contributed to your HSA that year.
Catch up contributions
For individuals age 55 and older, additional catch-up contributions are allowed. For 2018, this amount is $1,000.
All contributions to an HSA must stop once the individual becomes eligible for Medicare.
Withdrawals from an HSA can be made on a tax-free basis as long as they are used to pay for qualified medical expenses.
Non-qualified withdrawal penalties
Withdrawals prior to age 65 for non-medical expenses, an additional 20% tax penalty is imposed on the amount of the non-qualified withdrawal.
Tax Filing Deadline
It’s important to remember that HSA contributions must be made by the tax filing deadline each year, even if you are filing an extension. The majority of HSA participants prefer the ease and convenience of payroll deductions. You can also make direct contributions to an HSA outside of work. You can contribute directly to an HSA by simply writing a check or setting up automatic transfers from your bank account.
What to do?
HSAs do have some potential drawbacks. The biggest is that if you’re not enrolled in a high deductible health plan, you won’t have access to an HSA.
While your premiums for that high deductible health plan might be lower, you’ll still need to have cash available to meet your deductible if you get sick or injured and need medical care.
The money you may intend to save in your account may be needed to meet your deductible for that high deductible health plan.
If you can afford a high deductible health plan and you have the extra money in the bank to pay for emergency medical expenses than an HSA might be right for you. You should consider the good and bad when making a decision.
Health savings accounts provide much-needed protection to help pay for current and future health-related expenses. HSAs can also benefit you by lowering your income taxes.
It also provides funds to help pay for expenses which are usually a top concern once you reach retirement. In fact, it is often recommended to pay for health care costs out-of-pocket when possible. This would allow your HSA money to continue growing tax-free for retirement.
How do I start an HSA? First, you have to have a qualifying health insurance plan. A qualifying health insurance plan is one that carries a high deductible. If you think you have a high-deductible health insurance plan then you can contact your employer, health insurance company, or private banks and credit unions about setting up an HSA.
What happens if I lose my health insurance? Once you have money in your HSA, you can continue to use it even if you do not have a high-deductible plan, but you cannot keep contributing money to your health savings account.
Can I use my HSA money to pay for my health insurance premiums? You can use your HSA money to pay for your health insurance premiums while you are unemployment benefits. You can also use your HSA money to pay for COBRA premiums.
What if I need medical care in another country… can I use my HSA money there? Yes, your HSA money can be used for the same medical expenses anywhere and in another country.
When I die, do I lose my HSA money? No. You can name a beneficiary to receive your health savings account money.
Can my HSA money be invested? Yes. Your health savings account money can be invested similar to a 401K.