The United States is having a medical debt crisis. Many families are unable to pay for medical care right away. Figures vary widely depending on the individual’s insurance coverage, health condition, and the type of medical treatment received. It’s worth noting that medical debt can have significant long-term financial implications, including damage to credit scores, difficulty securing loans or mortgages, and even bankruptcy. However, there’s a way to manage your healthcare costs and maximize your tax savings – by opening a Health Savings Account (HSA).
What is an HSA?
A Health Savings Account (HSA) is a tax-exempt account set up with an insurance company, bank or other financial institution or trustee that you can use to pay for certain qualified medical expenses. Employees can open an employer-sponsored Health Savings Account if they are eligible, and people who are self-employed may also qualify for an HSA.
Who is eligible for an HSA?
To be eligible for an HSA, you must be enrolled in a qualified high-deductible health plan (HDHP). If you have an employer-sponsored HDHP, you may be able to open an HSA through your employer. Self-employed individuals may also qualify for an HSA.
What are the benefits of an HSA?
There are several benefits to having an HSA:
Tax Savings
One of the most significant advantages of an HSA is the tax savings. Your contributions you make to the Health Savings Account are tax deductible. So, you’re contributing pre-tax dollars, and as long as you spend the funds on qualified medical expenses, you won’t be taxed on withdrawals. In addition, any earnings from HSA funds that you’ve invested also accumulate tax-free.
Flexibility
With an HSA, you have the flexibility to choose how you use your funds. You can use your HSA savings to cover a wide range of medical expenses, including deductibles, copayments, and even some alternative healthcare treatments.
Long-Term Savings
Unlike a Flexible Spending Account (FSA), an HSA is not a “use it or lose it” account. Any money you contribute to your HSA rolls over from year to year, so you can save for future medical expenses. Additionally, you can save for large medical expenses, such as a surgery or procedure that you will need in the future, or build a high balance that can cover unexpected medical emergencies later.
Lower Healthcare Costs
By contributing to an HSA, you can lower your out-of-pocket healthcare costs. With an HDHP, you pay for your medical expenses until you reach your deductible. Once you’ve reached your deductible, your insurance starts covering your costs. With an HSA, you can use your savings to cover your deductible and other medical expenses, reducing your overall healthcare costs.
A Health Savings Account (HSA) is an excellent option for managing healthcare costs while boosting your financial wellness. By taking advantage of the tax benefits, lower healthcare costs, long-term savings, and flexibility, you can improve your financial health while maintaining your physical health.
How can I set up an HSA?
To set up an HSA, you’ll need to find a provider that offers HSA accounts. You can search online for HSA providers, or ask your employer if they offer an HSA option. Once you’ve found a provider, you’ll need to open an account and start making contributions.
Think you’re a good candidate for a Health Savings Account? Here’s what you need to know.
You must use HSA funds for qualified medical expenses
For withdrawals to be tax-free, you must spend the funds on “qualified medical expenses” as defined by the IRS. Qualified medical expenses are generally those that would qualify for the medical and dental expense deduction on your federal income taxes. To see a list of qualified medical expenses, see IRS Publication 502.
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You must have a high-deductible health plan to be eligible
Whether you’re self-employed or have a Health Savings Account through your employer, you must have a high deductible health plan (HDHP) to qualify for an HSA. For 2021 and 2022, the IRS defines a high deductible health plan as one that has at least $1,400 for an individual and $2,800 for a family. Also, for 2021, the HDHP’s annual out-of-pocket expenses can’t exceed $7,000 for an individual, or $14,000 for a family, not including out-of-network expenses. In 2022, that out-of-pocket limit can’t be more than $7,050 for an individual or $14,100 for a family.
You can’t have additional health plan coverage
To be eligible for an HSA, you can’t have any other health coverage, with a handful of exceptions. Other insurance you can have and still be eligible for an HSA includes certain types of liability insurance, insurance for a specific illness or hospitalization insurance that pays a specific amount per day. You’re also allowed to have insurance coverage for accidents, disability, dental care, vision care and long-term care in addition to your HDHP. You can also have telehealth and other remote care (for plan years before 2022).
There is an annual HSA contribution limit
The amount you can contribute to an HSA depends on the type of HDHP coverage you have, your age, the date you became eligible for an HSA and the date you cease to be eligible. For 2021, you can contribute up to $3,600 if you have an individual HDHP, or up to $7,200 if you have family coverage. For individuals 55 and older at the end of their tax year, the contribution limit is increased by $1,000. Once you are enrolled in Medicare, however, your annual contribution limit is reduced to zero.
Find out: How to Save for Healthcare in Retirement
The CARES Act expanded HSA spending
The Coronavirus Aid, Relief and Economic Security (CARES) act expanded the list of items considered “qualified medical expenses” that may be reimbursed from a health savings account, making menstrual products and over-the-counter medications now reimbursable from HSA accounts.
Your HSA balance rolls over
If you haven’t spent your HSA balance by the end of the tax year, no problem. Your balance rolls over into the next year, every year, without penalty. That way, you can continue to contribute and build up the balance to cover future medical expenses.
