While a lot can change from year to year, one constant has been the increasing cost of health insurance, doctor visits, and medicine. While there is typically little control over what is paid for medical costs, depending on the type of health insurance you have, a health savings account (HSA) can be a great vehicle to help save for and pay medical expenses. This article will cover who is eligible for an HSA, the benefits, and how it can be used as a long-term savings plan to pay for major medical expenses down the road or in retirement.
HSA Eligibility & Contribution Limits
To open an HSA, you must be considered an “eligible individual” by meeting the following requirements with respect to any month:
- You are covered under a qualifying high-deductible health plan (HDHP) that meets the minimum deductible and maximum out-of-pocket amounts on the first day of the month.
- You are not enrolled in any parts of Medicare, TRICARE, or TRICARE For Life.
- You are not covered under another medical plan that is not a high-deductible plan and provides coverage for any benefit that is covered under the HDHP, e.g., a spouse’s plan.
- In most circumstances, you are not using a medical flexible spending account (FSA) or a health reimbursement arrangement.
- You cannot be claimed as a dependent on someone else’s tax return.
- There are less common situations that can affect your eligibility for HSA contributions, which can be found within IRS Publication 969.
All HDHP participants are eligible to contribute to an HSA. For 2024, an individual with self-only coverage can contribute up to $4,150 and those with family coverage, up to $8,300. If you are 55 or older by the end of the tax year, you can make a catch-up contribution of up to an additional $1,000. Like contributions to an IRA, you have until the tax filing deadline to make contributions for the previous tax year. Some employers offer (tax-free) matching contributions to their employees who actively contribute to an HSA. These employer contributions count toward the annual contribution limit.
If you are turning 65, still working, and contributing to an HSA, you have a lot to consider between enrolling in or opting out of Medicare to continue your HSA contributions. There are many factors involved in this decision.
Tax Advantages
Similar to a traditional 401(k), contributions to your HSA are tax deductible. Contributions are an “above-the-line” deduction, meaning they reduce your adjusted gross income and can be deducted even if you do not itemize your deductions on Schedule A.
Once the contributions have been made to an HSA, earnings accumulate tax-free, and any distributions used for “qualified medical expenses” of an account beneficiary can be withdrawn tax-free. Outside of cosmetic surgeries, HSAs can generally be used for most medical expenses for you and your dependents. Read more about expenses that are covered by reviewing IRS Publication 502. The ability to access funds tax-free means the HSA is one of the few triple tax-advantaged vehicles.
If you choose to withdraw HSA funds for anything other than a “qualified medical expense” of an account beneficiary, these amounts are includible in your gross income in the year received. In addition, if you are under age 65 (unless disabled), the tax imposed on nonqualifying distributions is increased by 20% of the includible amount. For those 65 or older, nonqualified distributions are taxed as ordinary income.
Unused Funds
Unlike FSAs, where funds are lost if not used by a certain date each year, funds in your HSA roll over automatically each year and will remain there until used. With HSAs, there is no expiration date or age at which distributions must begin, so you can use the funds to pay for current medical expenses or save for future ones. The HSA also is “portable,” meaning that it stays with you if you change employers or leave the workforce. If you become ineligible to make contributions to an HSA, you can still take tax-free distributions from your existing HSA to pay for qualified medical expenses.
Most HSA providers will allow you to invest a portion of your balance into securities for potential longer-term growth. Some providers give you a menu of investment choices (like a 401(k) plan) to choose from, while others might leave the investment selection entirely up to you. If you decide to invest a portion of your HSA dollars, be sure that your investment selections match your overall risk tolerance and long-term goals.
When setting up an HSA, a beneficiary should be chosen, as this dictates what happens to the HSA when you die. If the beneficiary is your spouse, the HSA will be treated as your spouse’s HSA after your death. If the beneficiary is not your spouse, the account stops being an HSA at your death and the fair market value of the account is taxable to the beneficiary in the year of your death.
Save Your Medical Receipts
If you have an HSA, you have the choice to pay for medical expenses out of pocket and let your HSA balance grow. If you make this decision, save your medical receipts as any qualified medical expenses incurred are eligible for reimbursement in future years. Unlike FSAs, which have a “use it or lose it” feature, the reimbursement from an HSA does not have to occur in the same year as the expense. This gives you flexibility if your HSA balance becomes larger than what you need in future years. For example, you have the option to reimburse yourself in, say, 2029 for a qualified medical expense that occurred in 2024.
Expenses in Retirement
Often, a retiree’s largest expense in retirement is the cost of healthcare. An HSA with a large balance can help alleviate some of those costs as it can be used for Medicare premiums, copays, prescription drugs, etc. In some cases, it also can be used to pay for a portion of your long-term care policy premiums.
An HSA Is Not Right for Everyone
While HSAs have many benefits for those eligible, they are not meant for everyone. As the name implies, being enrolled in an HDHP means you will have higher deductibles to meet and potentially higher maximum out-of-pocket costs. Depending on your and/or your family’s health and financial situation, your needs may be better met with a traditional health plan. As with most financial and health decisions, what is right for someone else may not be the best choice for you.
If you have any questions, please reach out to a FORVIS Private Client™ professional.