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October 31, 2023

HSA Benefits – The Good, The Better, and The Best!

by Shalmali Kulkarni

Health Savings Accounts are very popular and, if available to you, very often are highly recommended. Most employers now offer additional high deductible health care plans with an HSA account feature to make their benefits package even more enticing. But why are HSAs so popular? And, if you have access to one, should you sign up?

HSA Benefits

Let’s start with the basics – What is an HSA?

An HSA (short for Health Savings Account) is a type of account in which you can set money aside that you can use for out-of-pocket medical expenses. However, not everyone is eligible for an HSA. To be eligible to participate, you should have a high-deductible health plan (HDHP). These plans have a high deductible as compared to other health care plans. Per the IRS, deductibles must be at least $1,400 per person or $2,800 per family. Total out of pocket expenses per year for a HDHP can be as high as $7,000 per person and $14,000 per family.

If you are single, you can contribute a maximum of $3,850 to an HSA plan for 2023 and if you are married, you can contribute a maximum of $7,750 to an HSA plan.

Tax Benefits of an HSA

HSA accounts have a triple tax benefit.

1.     The Good

The HSA is a pre-tax account. This means you get an above-the-line tax deduction for every dollar you contribute to your HSA.
(Note: You can only contribute when you are part of an HDHP plan. Hence, once you sign up for Medicare, or at age 65, whichever is earlier, you are no longer eligible to contribute.)

2.     The Better

The HSA is also tax-deferred. Once your contributions are in the HSA, you can invest these to earn a return on them. Any income earned on these investments is tax-deferred, so you don’t pay any tax while the money remains inside the HSA.

3.     The Best

The HSA also has tax-free withdrawals. Prior to age 65, money from the HSA must be used to pay for medical expenses. All funds withdrawn for medical expenses are tax free. Hence you never pay tax on this money. However, if funds are withdrawn for non-medical expenses, 100% of the proceeds withdrawn will be taxed as ordinary income and a 20% penalty will be charged. Once you are age 65, the HSA now becomes a regular retirement account. Funds used for medical purposes continue to be tax free, however, funds used for non-medical purposes are no longer subject to a penalty. They will still be subject to ordinary income tax.

HSA for Married Couples

The IRS states that HSAs must legally belong to an individual only. Hence, if you are married, you could either have two separate HSAs for each individual or just have one HSA in the name of one of the individuals of the couple. As a family, you are eligible to contribute a maximum of $7,750 to an HSA in 2023. You can split the contributions in one of three ways:

  1. Equally between both spouses’ HSA.
  2. Unequally between both spouses’ HSA.
  3. 100% to any one of the spouses’ HSA.

Even if you only have one HSA, you can use the funds to reimburse medical expenses for yourself or your spouse, as well as any dependent children.

HSA vs FSA

A Flexible Spending Account (FSA) is another type of account that you can use to pay for certain out-of-pocket health care costs. Both the HSA and FSA plans are pre-tax accounts meant to pay for out-of-pocket expenses. However, there is one big difference between the two. The FSA plan is a ‘use-it or lose-it’ plan, which means that if you don’t use the funds in the FSA by the end of the calendar year, you lose the funds in the account. With the HSA there is no deadline. The funds continue to rollover from one year to the next and can be used as, and when, required.

Another big difference is that Flexible Spending Accounts are only available if you have job-based insurance; you can’t use an FSA with a government Marketplace plan.

(Note: You cannot contribute to both an HSA and FSA in the same year. You must elect one of the two. If you are married, you also cannot elect the HSA plan if your spouse already participates in the FSA plan.)

Basically, an HSA plan is the best, but should you elect to participate in it?

The decision to participate in a HDHP and HSA account is a big one. It depends on many factors such as how often do you need to see the doctor, do you already have an established set of doctors, does the HDHP include your doctors in their network, what are your typical annual medical bills, etc.? A High Deductible Health Plan will have low premiums; however, if your annual medical bills are high, it may not make sense to participate in this plan due to the high deductibles.

Thus, we recommend you review your health insurance plans in much detail before you decide to sign on. If, after reviewing your plans, you still aren’t sure what makes the most sense for you, feel free to contact us.

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