Tag: High Deductible Health Plan
Save with a Health Savings Account
April 27, 2021
A Health Savings Account (HSA) is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in an HSA to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs.
An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. Contributions, other than employer contributions, are deductible on the eligible individual’s tax return whether or not the individual itemizes deductions. Employer contributions aren’t included in taxable income and distributions from an HSA that are used to pay qualified medical expenses aren’t taxed.
High Deductible Health Plan
One way to manage your health care expenses is by enrolling in a High Deductible Health Plan (HDHP) in combination with opening an HSA. While you can use the funds in an HSA at any time to pay for qualified medical expenses, you may contribute to an HSA only if you have an HDHP—generally a health plan that only covers preventive services before the deductible. For plan year 2021, the minimum deductible is $1,400 for an individual and $2,800 for a family. (The term “minimum deductible” refers to the amount you pay for health care items and services before your plan starts to pay.) Maximum out-of-pocket costs (the most you’d have to pay if you need more health care items and services) are $7,000 for an individual and $14,000 for a family.
Contribution Limits in 2021
For calendar year 2021, the annual limitation on deductions for an individual with self-only coverage under an HDHP is $3,600. The annual limitation on deductions for an individual with family coverage under an HDHP is $7,200. The IRS announces annually the HSA contribution limit that applies each calendar year. You can review IRS Publication 969 each year to determine the current limit.
HSA funds roll over year to year if you don’t spend them. An HSA may earn interest or other earnings, which are not taxable.
Some health insurance companies offer HSAs for their HDHPs. Check with your company to see if you are eligible. You also can open an HSA through some banks and other financial institutions. If you are interested in enrolling for healthcare coverage through the U.S. Department of Health and Human Services’ Health Insurance Marketplace®, you can check to see if specific plans are “HSA-eligible.”
It’s also important to note that there is an aggregate limit that applies to both your own contributions as well as any money your employer puts into your account. This is different from 401(k) rules, where an employer’s matching funds do not affect your ability to contribute to your account. If your employer puts $2,000 into your HSA and you have self-only coverage, you would be allowed to contribute only $1,600 before reaching the 2021 contribution limit.
HSA account holders who are 55 and older are entitled to make an additional catch-up contribution valued at $1,000 on top of contribution caps. Because of the HSA catch-up contribution rules, in 2021 the self-only coverage limit is $4,600 and the family coverage limit is $8,200
Catch-up contributions are intended to help older Americans who may incur outsized medical expenses, or who may not have saved enough for a secure retirement and want to boost their contributions to tax-advantaged accounts as they near the end of their careers.
Older Americans may want to make catch-up contributions because healthcare costs tend to rise with age and because an HSA can be a valuable type of retirement savings account. HSAs work as a retirement savings plan because money can be withdrawn penalty-free for any purpose, not just medical expenses, after age 65. Once an HSA account holder turns 65, distributions not used for medical costs are taxed at their ordinary income tax rate, the same as distributions from a 401(k) or traditional IRA.
HSA Funds and Taxes
Because HSA contributions can be made with pre-tax funds, you can deduct the amount you’ve contributed from your taxable income in the year you make the contribution.
The fact that HSA contributions are tax deductible means any money you contribute reduces the income you’re taxed on, which saves you money on the taxes you pay to the IRS. It also means your take-home pay declines by a smaller amount than what you actually contributed.
For example, if you have $50,000 in taxable income and make a $3,600 deductible contribution to an HSA, you will be taxed on only $46,400 in income due to your contribution.
The specific amount you save due to your HSA contribution will depend both on how large your contribution is and on your tax rate. Those who are taxed at a higher rate and those who make larger contributions will realize more savings.
Contributions are tax-deductible up to HSA annual limits, and money can be withdrawn tax-free to cover qualifying medical expenses.
Money in an HSA can be invested and can be withdrawn for any purpose after age 65 without penalty, although you’ll be taxed at your ordinary income tax rate for distributions not used for covered medical costs.
The IRS provides a comprehensive list of medical and dental expenses that qualify in Publication 502 and include the following categories:
- Prescription medications
- Nursing services
- Long-term care services
- Dental care
- Eye care, including eye exams, glasses, and contact lenses
- Psychiatric care
- Surgical expenses
- Fertility treatments
- Chiropractic care
- Medical equipment
- Hearing aids
Under the CARES Act, which passed in March 2020, you can now use your HSA funds to pay for a variety of over-the-counter (OTC) items without a prescription. The rules are retroactive to Jan. 1, 2020, so if you purchased these items with non-HSA funds, you can still submit your receipts for reimbursement.
Telemedicine or remote healthcare can be covered by HSA plans at no charge, even if you haven’t met your deductible, through the end of 2021.
The following items also have been made HSA-eligible by the 2020 CARES Act:
- Acid reducers
- Acne treatment
- Allergy and sinus medications
- Anti-allergy medications
- Breathing strips
- Cough, cold, and flu medications
- Eye drops
- Feminine hygiene products
- Heartburn medications
- Insect repellant and anti-itch creams
- Lip treatments for cold and canker sores
- Medicated shampoos and soaps
- Nasal sprays
- Pain relievers
- Skin creams and ointments
- Sleep aids
- Sunscreen and OTC remedies to treat the effects of sun exposure
The Bottom Line on HSAs
HSAs give you the opportunity to set aside money so you can pay for medical care with pre-tax dollars. But because you can invest and grow these funds as well as hold them in cash, HSAs offer much more than just a way to save on medical care. If used as a long-term investment vehicle, your HSA account could help you save on healthcare costs in retirement while reducing your tax bill in the meantime.
During each calendar year, you can keep track of all your HSA contributions, expenses, and tax-accounting details at insureyouknow.org.