What is an HSA and are you eligible to use an HSA?

Updated: Jul 20

A Health Saving Account (HSA) is a tax-advantaged savings account that allows an individual to set aside pre-tax dollars to pay for qualified medical expenses. By using untaxed dollars in a Health Savings Account (HSA) to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs. However, there may be more benefits that simply lower overall health costs.

NOTE: HSA funds generally may not be used to pay health premiums.

The insured individual, or their employer, make regular contributions to the account. These funds are not subject to federal income taxes at the time of the deposit or withdrawal if the funds are used for qualified medical expenses that HDHPs don’t cover, including the deductible expenses. HSA contributions do not have to be spent or withdrawn during the tax year they were deposited. Any unused contributions can be rolled over—indefinitely.


The HSA tax-advantaged savings can be used in retirement when the early withdrawal penalty for nonqualified expenses no longer applies. However, if you are under the age of 65, any withdrawals for nonqualified expenses are subject to income tax and a 20% early withdrawal penalty.


Sounds great! What’s the catch?

While you can use the funds in an HSA at any time to pay for qualified medical expenses, you may contribute to an HSA only if you have a High Deductible Health Plan (HDHP). An HDHP is a health plan (including a Marketplace plan) that only covers preventive services before the deductible. For plan year 2022, the minimum deductible for an HDHP is $1,400 for an individual and $2,800 for a family. When you view plans in the Marketplace, you can see if they’re "HSA-eligible."


For 2022, if you have an HDHP, you can contribute up to $3,650 for self-only coverage and up to $7,300 for family coverage into an HSA. HSA funds roll over year to year if you don't spend them. An HSA may earn interest or other earnings, which are not taxable.


Some health insurance companies offer HSAs for their HDHPs. Check with your company. You can also open an HSA through some banks and other financial institutions.


Who Are High-Deductible Health Plans best suited for?

Before you can answer that question, you need to understand what a HDHP is and what it is not. A high-deductible health plan is a health insurance plan with a sizable deductible and lower monthly premiums. Routine preventive care is fully covered, which means that individuals aren't responsible for copays or coinsurance. It is important to note that only HDHPs qualify for tax-advantaged health savings accounts.

  • Younger, healthier people who don’t expect to need health care coverage except in the face of a serious health emergency.

  • Wealthy individuals and families who can afford to pay the high deductible out of pocket and want the benefits of an HSA may benefit from HDHPs.

NOTE: For 2021 and 2022, the IRS defines an HDHP as one with a deductible of at least $1,400 for individuals and $2,800 for families.


Why were HDHPs Created?

The thought behind HDHPs is that they will lower overall health care costs by making people more aware of the cost of medical expenses. Before coverage can be activated, the individual must pay the deductible out of pocket. When an individual pays that portion of a claim, the insurance company covers the remaining portion, as specified in the contract.

The higher deductible also lowers insurance premiums, leading to more affordable monthly costs. This arrangement benefits healthy people who need coverage only for serious health emergencies. In addition, wealthy families who can afford to meet the deductible, also benefit because it offers access to a tax-advantaged Health Savings Account.


These plans fully cover routine preventive care for the following items without copays or coinsurance before the deductible kicks in. (please note that the list is not all inclusive):

  • Blood pressure screening

  • Depression screening

  • Diet and nutritional counseling

  • HIV screening

  • Immunizations for diseases, such as chickenpox, the flu, and the measles

The High-Deductible Health Plan also comes with an annual catastrophic limit on out-of-pocket expenses for covered services from in-network providers. The maximum deductible for 2022 is $7,050 for an individual and $14,100 for a family. When you reach this limit, your plan pays 100% of your expenses for in-network care.


What is an HSA and why is it only available with a High-Deductible Health Plan?


A health savings account (HSA) is a tax-advantaged savings account and are only available to people covered by an HDHP. The insured individual, or their employer, make regular contributions to the account. These funds are not subject to federal income taxes at the time of the deposit or withdrawal if the funds are used for qualified medical expenses that HDHPs don’t cover, including the deductible expenses.

NOTE: HSA contributions do not have to be spent or withdrawn during the tax year they were deposited. Any unused contributions can be rolled over—indefinitely.

For wealthy families who can afford to self-insure, an HDHP allows access to HSA tax-advantaged savings that they can use in retirement when the early withdrawal penalty for nonqualified expenses no longer applies.


However, if you are under the age of 65, any withdrawals for nonqualified expenses are subject to income tax and a 20% early withdrawal penalty.


Advantages and Disadvantages of a High-Deductible Health Plan (HDHP)

Advantages

Insured individuals with an HDHP end up paying lower monthly premiums. If you know that you are only going to need preventive care for the calendar year, then an HDHP would save you money.


Covered individuals are allowed to use a tax-advantaged HSA with an HDHP, so the money that you deposit into your HSA is tax-free and will help cut the cost of your high deductible.


Disadvantages

Higher deductibles mean that you have to pay more out of your own pocket for your medical and health care before the plan actually starts to pay for you. This can be a significant issue, if you have unexpected health issues.


Who Offers High-Deductible Health Plans?

You can get coverage under an HDHP through your employer. These plans are also available through government health care exchanges.


To read the full article on Investopedia, Click Here: https://www.investopedia.com/terms/h/hdhp.asp

To learn more about the government health care HDHPs, Click here: https://www.irs.gov/publications/p969






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