Health Savings Accounts (HSAs) are a way to save for future healthcare expenses, much like how many individuals use 401k plans to save for retirement. Just as your 401k savings stay with you when you leave your employer, your HSA savings also stay with you when you leave your employer. Whether you contribute to your HSA or your employer contributes on your behalf, these contributions can lower your taxable income.
An HSA is also a great investment tool. Depending on how you invest those savings, the amount can grow over time, tax-free. And any withdrawals you make to pay for qualified health expenses are also not taxable. Below are 5 things to keep in mind when you’re considering opening an HSA:
1. Eligibility for an HSA:
You may only contribute to an HSA if you enroll in a qualified high-deductible health plan (HDHP). In 2023, the minimum deductible that qualifies a plan to be an HDHP is $1,500 for an individual and $3,000 for a family. The maximum out-of-pocket for an HSA-qualified plan would be $7,500 for an individual and $15,000 for a family. Most qualified plans indicate if they are HSA compatible.
Note: You must stop contributing to your HSA at least 6 months prior to enrolling in Medicare, otherwise, you may incur a tax penalty. If you are delaying enrollment in Medicare, you or your employer may continue to contribute to your HSA.
2. The Triple-Tax Advantage of Opening an HSA:
- Your contributions to this account reduce your taxable income just like a 401k plan. Your employer may also contribute.
- Any investment grows tax-free.
- Your qualified withdrawals to spend on healthcare expenses are tax-free. Otherwise, there is a 20% penalty and you pay additional income tax on non-healthcare or non-IRS-qualified medical expenses if you are under 65 when you take a withdrawal.
Unlike other health-related accounts such as a flexible spending account, any unused funds roll over to the next year. Additionally, when you turn 65, you may start making withdrawals from the HSA for any type of purchase, other than qualified healthcare expenses. These withdrawals, while not subject to a 20% penalty, will be taxed at your income tax rate.
3. Using your HSA:
There are hundreds of eligible healthcare expenses including office copays, over-the-counter items, mental health treatment, dental care, and vision care. Check the IRS website for an updated list every year. Withdrawals from an HSA can pay or reimburse for current or past (that date back to the day of account opening) healthcare expenses.
4. Annual Contributions and Timing:
- In 2023, the maximum individual contribution is $3,850 while the maximum family contribution is $7,750.
- If you sign up after January, your annual, eligible contribution will be prorated. For example, if you were to sign up in April, you would only be able to contribute $2,887.50, which is calculated by dividing the annual max by 12 and then multiplying this number by the number of months you are enrolled in the HSA.
- If you sign up in December, you may be eligible to contribute the maximum contribution for the current year and next year under the last-month rule. This is only if you’re eligible on the first day of the last month of the tax year (December 1).
- If you’re not eligible through the entirety of the next year (up until December 31st of the following year), you’ll have to include the amount you contributed for the months you were ineligible in your income in the following tax return. This amount will also be subject to an additional 10% tax.
5. Choosing an HSA:
Many high-deductible health plans have a relationship with an HSA administrator. HSA administrators may differ on the investment options they offer. Some have monthly maintenance fees and/or opening and closing fees associated with them. If you are not satisfied with the HSA administrator with your employer-sponsored or marketplace plan, you may always switch. Your bank, your financial institutions, or your financial advisor may be a good source for identifying HSA administrators.
Caribou can assist in finding you a variety of HSA health insurance options that fit your needs.
Learn More:
Health Savings Accounts (HSAs) and Medicare | Medicare Interactive
https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/medicare-6-month-lookback-for-hsa-contributions.aspx Society of Human Resources
Fidelity.com
Last Revised March 3rd, 2023
