Health Savings Accounts (HSAs) have emerged as a popular option for individuals and families seeking to manage healthcare expenses more effectively. These accounts offer a range of features designed to provide flexibility, tax advantages, and long-term savings potential. Understanding the key features of HSAs is essential for maximizing their benefits.
Eligibility
Let’s first establish who is eligible for an HSA. An individual with coverage under a qualifying high-deductible health plan (deductible not less than $1,600) can contribute up to $4,150 — up $300 from 2023 — for the year. The maximum out-of-pocket is capped at $8,050.
An individual with family coverage under a qualifying high-deductible health plan (deductible not less than $3,200) can contribute up to $8,300 — up $550 from 2023 — for the year. The maximum out-of-pocket is capped at $16,100.
If you are unsure of your deductible, you can contact your company's human resources contact(s) or those dealing with the benefits and health insurance.
If you have chronic health issues or are expecting a significant medical expense (surgery, birth, etc.), it may not make sense to elect into an HSA-eligible plan and it is potentially cheaper to enroll in a low-deductible medical plan or one that offers a Flexible Spending Account (FSA).
Flexibility in Contributions
HSAs offer flexibility in contribution amounts and timing, allowing individuals and families to contribute up to a specific limit each year. The IRS sets these contribution limits and may vary depending on whether the HSA is for an individual or a family. There are two ways to make HSA contributions:
Payroll deductions through your employer
Making direct contributions to the HSA from a linked bank account
Like IRA contributions, where you have until the tax filing deadline to contribute for the prior year, an HSA can also be done this way. The difference for an HSA is when you make it for the preceding year, you cannot contribute through your payroll and instead would need to make it through a linked bank account.
Tax Advantages
One of the primary attractions of HSAs is their tax advantages. Contributions to an HSA are typically tax-deductible, reducing the account holder's taxable income for the year. Additionally, funds in an HSA can be invested, and any earnings grow tax-free. Withdrawals used for qualified medical expenses are also tax-free, making HSAs a triple-tax-advantaged savings vehicle.
You can save on all income tax levels: federal, state, and local, by contributing to an HSA. In addition, when contributions are made through your employer’s payroll, you also avoid paying 7.65% on payroll or FICA taxes (6.2% Social Security and 1.45% Medicare).
Below is what an individual/family who is in the following marginal tax brackets (the rate paid on your last dollar): 22% federal, 4% state, and 2% local would realize in tax savings if they contributed the maximum available based on your age and individual/family plan eligibility.
Portability and Ownership
Another notable feature of HSAs is their portability and ownership. Unlike Flexible Spending Accounts (FSAs), which are typically tied to an employer and may have "use it or lose it" provisions, HSAs are owned by the individual. This means that funds in an HSA belong to the account holder and can be carried over from year to year, even if they change jobs or health insurance plans.
Since there is no time length that you’re required to reimburse yourself for medical expenses, you can pay for a medical bill in 2024 out of a bank account and reimburse yourself from the HSA in 2034. This allows your dollars to be invested and grow as long as you’re alive!
Use for Qualified Medical Expenses
HSAs can be used to pay for a wide range of qualified medical expenses, including deductibles, copayments, prescription medications, and certain medical procedures not covered by insurance. Additionally, HSA funds can cover qualified dental and vision expenses. The flexibility in using HSA funds for various medical needs makes them a valuable tool for managing healthcare costs.
Long-Term Savings Potential
Beyond covering immediate healthcare expenses, HSAs offer long-term savings potential. Individuals can build a significant balance over time because funds can be invested and grow tax-free. This can provide a valuable source of funds for healthcare expenses in retirement when medical costs tend to increase. For those able to contribute consistently and invest wisely, HSAs can be a powerful tool for building financial security.
Closing Thoughts
In conclusion, Health Savings Accounts offer a range of features that make them an attractive option for individuals and families looking to manage healthcare expenses effectively. From tax advantages and flexibility in contributions to portability and long-term savings potential, HSAs provide a valuable tool for addressing both current and future healthcare needs. Understanding these features and discussing them with your financial advisor at Whitaker-Myers Wealth Managers is essential for maximizing the benefits of HSAs and making informed decisions about healthcare planning and savings strategies.