Healthcare costs continue to outpace an already robust inflation rate, which makes it difficult for millions of Americans to save for the most basic medical procedures. Even if you have purchased a comprehensive health insurance policy, you might be on the financial hook for a substantial amount of your healthcare costs, including paying a budget-draining deductible and taking care of procedures that are not covered by your plan.
What if we told you there is a way to save for future medical expenses if you meet certain criteria? We are talking about starting a Health Savings Account (HSA), which begs the question, should you consider a health savings account as a part of your health insurance plan?
How Does an HSA Work?
You cannot simply call an insurance broker to open a health savings account. You must meet specific criteria, such as buying a High-Deductible Health Plan (HDHP). If you have an HDHP, you combine the plan with an HSA to pay for certain medical expenses with money saved that is not taxed by the federal government. In 2022, the IRS defined an HDHP as any health insurance plan with an annual deductible of $1,400 for an individual and $2,800 for a family of any size.
Having an HDHP is just one criterion for opening a health savings account. You also cannot be covered by another health insurance policy, as well as not enrolled in Medicare. To qualify for an HSA, you also cannot have someone claim you as a dependent on a federal tax return.
The maximum contribution for a health savings account in 2022 was $3,650 for an individual and $7,300 for a family of any size. Federal tax law states that the maximum contributions come from both employees and employers for employer-sponsored health insurance policies. If you are at least 55 years old, federal law allows you to play catch-up by contributing an extra $1,000 to a health savings account.
Learn more about Maximizing the Benefits of Your Health Savings Account (HSA).
You can open an HSA only at certain financial institutions, with contributions made either in cash or deductions taken from a paycheck. If you open a health savings account for your family, a qualified family member can contribute to the HSA. Individuals that are unemployed or self-employed also are eligible to open a health savings account.
What Are the Advantages and Disadvantages of Opening an HSA?
Opening a health savings account delivers several advantages and disadvantages. Determining whether opening a health savings account is the right thing for you to do depends on your financial and personal status. For example, if you are in good health and have recently received a raise, you might benefit from opening an HSA.
What Are the Advantages of Opening a Health Savings Account?
The most significant advantage of opening an HSA concerns the tax implications. Both employer and employee contributions to a health savings account do not get taxed by the federal government. For instance, if you decide to deposit $1,000 into an HSA as an annual contribution, the federal government cannot tax the $1,000 as income. However, contributing more to a health savings account that is allowed by federal law triggers federal government taxation.
Distributions taken from a health savings account also are not taxed at the federal level, but the funds used must pay for qualified medical expenses as described by IRS guidelines. One of the lesser-known benefits of contributing to a health savings account is you can use the money placed into an HSA to invest in stocks, bonds, and other types of securities. This allows you to reap potentially higher returns than the returns generated by standard interest rates.
What Are the Disadvantages of Opening a Health Savings Account?
One of the most significant disadvantages of opening an HSA is you have to be a strong candidate for purchasing an HDHP. If you can afford a high deductible and discover you are in excellent health, then buying an HDHP makes financial sense. However, if you cannot afford a dramatic jolt to the family finances caused by paying out-of-pocket for medical care, then you should consider another way to save money to pay for healthcare services.
Health savings accounts also come with strict filing requirements, as well as stringent rules on withdrawals, record-keeping, and distribution reporting.
What Are the Difference Between an HSA and a Flexible Spending Account?
Health savings accounts are often incorrectly identified as Flexible Savings Accounts (FSAs). Although you can access both types of accounts to pay for healthcare costs, several key differences separate the two accounts.
FSAs are strictly employer-sponsored plans, while you can open an HSA as an employee, a self-employed business owner, and as someone collecting unemployment benefits. If you have an FSA, any unused funds at the end of a tax year do not roll over into the next year. You lose all the money left over at the end of an FSA tax year. Unlike a health savings account, contributions to an FSA must remain the same at the start of every tax year.
Ask Insurance Broker Hub for Advice on HSAs
Like anything regarding health insurance, there is a whole lot more nuance that you should know before diving into an HSA. IRS Publication 969 offers a lot more information, but the best way to find out whether a plan is right for you? Speak with a broker.
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