Health Savings Accounts (HSAs) have been around since 2003, but they still puzzle many people.
In a nutshell, HSAs are special savings accounts in which you can deposit untaxed money which then can also be used for medical expenses, also without being taxed. “Medical expenses” here includes all coinsurance and copay amounts from your health insurance, plus your costs for dental or vision care, and durable medical equipment such as crutches or wheelchairs.
The “catch” is that your health insurance coverage must be a “qualified high-deductible health plan” (called a QHDHP, or a HDHP, or sometimes just an “HSA plan”) for you to be allowed to deposit money in an HSA. (If you were previously covered by an HDHP and deposited money in an HSA, but are now covered by a non-HDHP traditional plan, you can still use the previously deposited money for medical expenses; you just can’t add money to your HSA when your coverage isn’t an HDHP.)
Unlike some other savings and spending arrangements available through employers, an HSA isn’t a use-it-or-lose-it arrangement; the money in your HSA is yours. Period. End of sentence. Even if your employer contributes funds to your HSA as part of your benefits, the money is still yours, and can roll over year to year, or move with you if you change employers.
Not only that, but the allowable expenses you can pay for with your HSA increases greatly once you enroll in Medicare: you can use your HSA to pay for out-of-pocket expenses that Medicare doesn’t cover such as deductibles, coinsurance and copays, and even your premiums for Medicare parts B, C (“Medicare Advantage”) and D (prescription coverage). In other words, an amassed HSA balance can act as an additional retirement account.
HSAs are often called “triple tax-advantaged,” and the third tax advantage is this: Once you have a certain amount built up in your HSA – usually $2,000-$3,000, depending on the HSA custodian – you can start investing in certain mutual fund options, and any growth from your investments is untaxed as well. (This may not be the case if you live in California, New Jersey, Tennessee or New Hampshire.)
With most employers, you can contribute to your HSA as a standing payroll deduction that will show up as non-taxable income on your W-2. Because HDHPs don’t offer office visit and Rx copays up front, they are usually cheaper than a traditional plan with the same deductible and out-of-pocket maximum; many people therefore decide to take the money they save by switching from a traditional plan to a HDHP and contribute that to their HSA. You can also choose to contribute a lump sum to your HSA at any time during the year – a tax return, for instance, or birthday money from Grandma – and write it off on your taxes.
“Sounds great!” you say. “I’m going to put as much money as I can into my HSA!”
So how much is that?
As with all tax-advantaged retirement accounts, the IRS imposes annual limits on contributions. For 2023, if you are enrolled as a single person in an HDHP, the maximum contribution is $3,850 to your HSA. If you and at least one dependent are enrolled together in an HDHP, the maximum is $7,750. In 2024, those limits are going up to $4,130 single and $8,300 family. (Remember, these annual limits include any contribution which your employer makes on your behalf.) Plus, if you are age 55 or older, you can contribute an additional $1,000 per year as a “catchup” contribution. Any amounts you don’t use for current medical expenses – again, money so used is still untaxed, so it ends up having more buying power than your standard, post-tax paycheck dollar – becomes part of your accumulated balance.
Most employers offer HSA options in addition to their traditional health insurance plans; if yours doesn’t, ask your HR if one could be added at your next insurance renewal. Reach out to us if your employer needs help deciding what options to offer!
