When you’re choosing a health plan, many factors may affect your decision. If you want an option with flexibility, a high level of choice and tax-advantaged savings, a high-deductible health plan with a Health Savings Account (HSA) might be the right choice for you.
What is an HSA?
HSAs are tax-advantaged savings accounts that accompany high-deductible health plans (HDHPs). They’re often seen as a great way to save money and efficiently pay for medical expenses.
HSAs were created in 2003 to provide individuals who have HDHPs with a tax-preferred method of saving money for medical expenses. There are certain advantages to putting money into these accounts, including favorable tax treatment*. The rationale behind the HSA/HDHP combination is that people will have a clearer idea of their medical costs and more control over their spending, enabling them to potentially reduce their medical costs.
HSA money can be used tax-free when paying for qualified medical expenses, helping you pay your HDHPs larger deductible. At the end of the year, you keep any unspent money in your HSA. This rolled over money can grow with tax-deferred earnings, and it’s used to pay for qualified medical expenses, then the money will continue to be tax-free.
To learn more about qualified medical expenses, please visit www.irs.gov.
Is an HSA right for you?
HSAs are a fast-growing trend in health care and offer many advantages, but whether it’s the right choice for you depends on several factors.
Comparing HSA/HDHPs to traditional health plans can be difficult, as each has pros and cons. For example, traditional health plans typically have higher monthly premiums, a smaller deductible, and fixed co-pays. You pay fewer out-of-pocket costs due to the lower deductible, but you will pay more each month in premiums.
HDHPs with HSAs general have lower monthly premiums and a higher deductible. You may pay more out-of-pocket medical expenses, but you can use your HSA to cover those costs, and you pay less each month for your premium.
The decision is different for each individual. If you are generally healthy and/or have a reasonable idea of your annual health care expenses, then you could save a lot of money from the lower premiums and valuable tax-advantaged account with an HSA/HDHP plan. For example, even someone with a chronic condition could take advantage of an HSA/HDHP plan if he or she has a good idea of his/her annual expenses and then budgets enough money to cover the cost of care.
However, if you are prone to illness or unexpected medical conditions, or prefer certainty in medical costs over the possible risk of unexpected out-of-pocket expenses, you may want to stick with a traditional plan.
How exactly do HSAs work?
To have an HSA and make contributions to the account, you must meet several basic qualifications. Here’s what you need to know to start saving with an HSA:
- You must have coverage under an HSA-qualified, high-deductible health plan.
- You must have no other health insurance plan (this exclusion does not apply to certain other types of insurance such as dental, vision, disability or long-term care coverage).
- You are not enrolled in Medicare.
- You cannot be claimed as an independent on someone else’s tax return.
To qualify as an HDHP, a health plan must satisfy requirements for the minimum annual deductible and the maximum out-of-pocket expenses.
In 2019, the minimum annual deductible for a qualifying HDHP was $1,350 for individual coverage and $2,700 for family coverage.
In addition, annual out-of-pocket expenses under the plan (including deductibles, co-pays, and co-insurance) cannot exceed $6,750 for single coverage and $13,500 in 2019 for family coverage.
- Contributions to your HSA can be made by anyone, including you, your employer or a family member. The combined contributions of you and your employer (and anyone else making contributions) cannot exceed the HSA maximum contribution limit.
- Contributions to the account must stop once you are enrolled in Medicare. However, you can still use your HSA funds to pay for medical expenses tax-free.
Annual contribution limits for 2019 are $3,500 for individuals, $7,000 for families and an additional $1,000 for people 55 and older.
An HSA is managed and controlled by the account holder, giving you the choice of when to use your HSA dollars. The money in it belongs to you—not your employer or insurance company.
*Consult your tax advisor.