Health Savings Account (HSA) eligible plans

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What is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals with high-deductible health plans (HDHPs) pay for out-of-pocket medical expenses. HSAs offer triple tax benefits: contributions are tax-deductible, investments grow tax-free, and withdrawals for qualified medical expenses are also tax-free.

Benefits of an HSA

  1. Triple Tax Advantages: As mentioned, HSAs have three tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for eligible medical costs.
  2. Roll Over: Unlike Flexible Spending Accounts (FSAs), any unused funds in an HSA roll over to the next year, allowing account holders to accumulate savings over time.
  3. Investment Opportunity: Some HSA providers allow account holders to invest their savings, which can lead to long-term growth, similar to retirement accounts.
  4. Ownership: An HSA is owned by the individual, not an employer. This means if you change jobs, your HSA goes with you.
  5. Flexible Spending: HSAs can be used for a wide range of qualified medical expenses, including certain over-the-counter medications and medical equipment.

Eligibility for an HSA

To be eligible for an HSA, one must:
  1. Be covered under a high-deductible health plan (HDHP).
  2. Have no other health coverage (with some exceptions, such as dental, vision, long-term care, and certain others).
  3. Not be enrolled in Medicare.
  4. Not be claimed as a dependent on someone else’s tax return.

What is an HSA-Eligible Plan (High-Deductible Health Plan – HDHP)?

An HDHP is a health insurance plan that typically comes with a higher deductible than traditional insurance plans. It has:
  1. Lower Premiums: HDHPs usually offer lower monthly premiums in exchange for higher out-of-pocket costs.
  2. Minimum Deductible Requirement: For a plan to qualify as an HDHP and be HSA-eligible, it must have a minimum deductible set by the IRS, which can change annually.
  3. Maximum Out-of-Pocket Limits: There are also out-of-pocket maximums set by the IRS. Once you hit this maximum, the plan typically pays 100% of covered costs.

Conclusion

HSAs and their associated HDHPs can be a valuable tool for those who want to manage their healthcare expenses in a tax-efficient manner. It’s essential to understand the benefits and criteria of these plans to determine if they are a right fit for your needs. Always consult with a financial advisor or health insurance professional when considering your health insurance options.

FAQ

An HSA-eligible plan is a high-deductible health plan (HDHP) that is compatible with a Health Savings Account. To be eligible to open and contribute to an HSA, you must be enrolled in an HDHP.

The benefits include potential tax savings (contributions are tax-deductible, withdrawals for qualified medical expenses are tax-free, and interest and investments grow tax-free), the ability to save and roll over unused funds year to year, and the option to invest HSA funds to potentially increase savings.

For 2023, the IRS has set the HSA contribution limits at $3,850 for individual coverage and $7,750 for family coverage. Individuals aged 55 and older can make an additional $1,000 catch-up contribution.

For 2023, an HDHP is defined as a plan with a minimum deductible of $1,400 for individual coverage or $2,800 for family coverage. Additionally, the out-of-pocket maximums cannot exceed $7,500 for individual coverage and $15,000 for family coverage.

Yes, but if you use HSA funds for non-qualified expenses and you are under the age of 65, you will have to pay income tax on the withdrawal plus a 20% penalty. After age 65, you can use HSA funds for any purpose without penalty, but you will still owe income tax on withdrawals not used for qualified medical expenses.

Your HSA is portable, meaning it stays with you regardless of your employment status. You can continue to use the funds in your HSA for qualified medical expenses.

Generally, you cannot contribute to an HSA and a health Flexible Spending Account (FSA) at the same time. However, there are limited types of FSAs, such as a limited-purpose FSA (which can only be used for vision and dental expenses) or a post-deductible FSA (which can only be used after the HDHP deductible has been met), that are compatible with HSAs.

You can make contributions to your HSA for a given tax year until the federal income tax filing deadline, which is usually April 15th of the following year.

Yes, your employer can contribute to your HSA, and any contributions they make do count toward your annual contribution limit.

The funds in your HSA can be passed on to your beneficiary after your death. If your spouse is the beneficiary, the HSA becomes their HSA. If the beneficiary is not your spouse, the account ceases to be an HSA, and the fair market value of the HSA becomes taxable to the beneficiary.

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