Health Savings Account (HSA)

What is a Health Savings Plan?

• A Health Savings Account (HSA) is a tax-advantaged account created for or by individuals covered under high-deductible health plans (HDHPs) to save for qualified medical expenses. Contributions are made into the account by the individual or their employer and are limited to a maximum amount each year. The contributions are invested over time and can be used to pay for qualified medical expenses, such as medical, dental, and vision care and prescription drugs.

• HDHPs have higher annual deductibles (the plan pays nothing until you reach these amounts in out-of-pocket expenses) but lower premiums than other health plans. The financial benefit of an HDHP’s low-premium and high-deductible structure depends on your personal situation.

• The minimum deductible required to open an HSA is $1,400 for an individual or $2,800 for a family for the 2022 tax year ($1,500 and $3,000, respectively, for 2023). The plan must also have an annual out-of-pocket maximum of $7,050 for self-coverage for the 2022 tax year ($7,500 for 2023) and $14,100 for families for the 2022 tax year ($15,000 for 2023). These maximums cap your out-of-pocket expenses.

• Contributions made to an HSA do not have to be used or withdrawn during the tax year. Instead, they are vested, and any unused contributions can be rolled over to the following year. Also, an HSA is portable, meaning that if employees change jobs, they can still keep their HSAs.

• An HSA plan can also be transferred to a surviving spouse tax free upon the account holder’s death. However, if the designated beneficiary is not the account holder’s spouse, then the account is no longer treated as an HSA, and the beneficiary is taxed on the account’s fair market value, adjusted for any qualified medical expenses of the decedent paid from the account within a year of the date of death.

• All in all, HSAs are one of the best tax-advantaged savings and investment tools available under the U.S. tax code. They are often referred to as triple tax-advantaged because:

  • Contributions are not subject to tax.
  • The money can be invested and grown tax free.
  • Withdrawals are not taxed as long as you use them for qualified medical expenses.

• As a person ages, medical expenses tend to increase, particularly when reaching retirement age and beyond. Therefore, starting an HSA early if you qualify—and allowing it to accumulate over a long period—can contribute greatly to securing your financial future.
  

What are the benefits of HSA?

• You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A (Form 1040).
• Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
• The contributions remain in your account until you use them.
• The interest or other earnings on the assets in the account are tax-free.
• Distributions may be tax-free if you pay qualified medical expenses.
• An HSA is “portable.” It stays with you if you change employers or leave the work force.

Qualified Medical Expenses

See Publication 502 for a comprehensive list of qualified medical expenses.

• Medical
  • Office visits
  • Diagnostic testing
  • Surgical procedures
  • Over-the-counter medications
  • Prescriptions
• Dental
  • Fillings
  • Cleanings
  • Braces
  • Artificial teeth
• Vision
  • Exams
  • Glasses
  • Contact lenses
  • Corrective surgery
• Other
  • Counseling
  • Cessation programs
  • COVID-19 tests
  • Face masks
  • Hand sanitizer and sanitizing wipes
• At age 65, you can spend your HSA dollars on anything, not just medical expenses, and you won't incur the 20% penalty. The withdrawal will just count toward your gross annual income.

References

• HealthEquity
• Investopedia
• Fidelity
• IRS
• Bank of America