Do you want the ability to pay medical costs using pre-tax dollars? What about accumulating retirement funds that may be used at any moment – tax-free and penalty-free – to cover unforeseen medical expenses? Do you prefer higher-deductible health insurance with lower monthly premiums?
A health savings account may have been recommended by the doctor (HSA). When utilized correctly, this new approach to health insurance may provide considerable benefits that can assist you in maintaining a healthy personal and financial life.
What is a Health Saving Account (HSA)?
HSAs are tax-advantaged personal savings accounts that provide both an investment and health coverage in conjunction with a high-deductible health plan (HDHP)
The savings account either pays for medical bills that are not covered by your HDHP or serves as an interest-bearing nest egg that increases over time (with HSAs, there aren’t any “use it or lose it” rules; funds remain in the account and can be used whenever they are needed; the account can also grow with interest or investment returns, depending on how it is set up).
Meanwhile, the HDHP acts as a safety net in case you need coverage for catastrophic medical expenditures that exceed your deductible. Furthermore, if your HDHP is not grandfathered, some preventive care must be provided without charge, regardless of whether you have met your deductible.
Remember that you’re paying a lower insurance premium because you have a high-deductible plan that only covers preventative care before the deductible. If you need to see a doctor for another reason, you’ll have to pay the full cost (reduced by your health plan’s negotiated rates) until your deductible is met.
What happens if I switch to a non-high-deductible health plan?
Whatever happens with your health insurance, your HSA is yours. However, if you switch to a non-HDHP (or add a second health plan to your HDHP), you must stop contributing to your HSA. Medical expenses, including out-of-pocket expenses, can still be covered by your HSA under your new non-HDHP health plan.
Once you enroll in Medicare, you cannot contribute to an HSA, even if you continue to work and have HDHP coverage via your employer in addition to Medicare. However, once you’ve enrolled in Medicare, you can withdraw tax-free funds from HSAs if you use them to pay for out-of-pocket medical expenses, including Medicare premiums.
Reporting HSA information to the IRS?
HSA contributions and withdrawals are still recorded on Form 8889. However, the HSA contribution deduction is now shown on Schedule 1 of Form 1040.
Nothing has changed regarding eligibility for the deduction. You can deduct after-tax contributions to your HSA from your taxable income if you make them rather than payroll deductions, which are already pre-tax.
Can the money in my HSA pay for Medicare or long-term care?
Yes. This is a popular financial strategy among folks who can cover average medical expenses with non-HSA income and have several years to invest in an HSA.
After enrolling in Medicare, HSA contributions are no longer allowed (for most people, this occurs at 65). At the age of 65, you may continue using your HSA tax-free if you only withdraw funds to cover approved out-of-pocket medical expenses. When you turn 65 and sign up for Medicare, you may use your HSA funds to pay your Part B, Part D, and Part C payments (Medicare Advantage).
Medigap premiums are not considered eligible HSA expenses; they cannot be paid using tax-free HSA funds. Non-Medicare premiums, on the other hand, cannot be reimbursed using tax-free HSA funds unless you receive unemployment benefits or are covered by COBRA. (All of this is detailed in IRS Publication 969.)
Long-term care costs can also be met using tax-free HSA contributions. Medicare does not cover long-term care; long-term care insurance can be expensive. If you can consistently save money in an HSA for several decades, you may have a large sum used to pay for long-term care expenses tax-free.
Responses to health savings accounts have been varied.
The country is divided on whether health savings accounts are a viable large-scale coverage alternative and if HSAs help or hurt the nation’s healthcare system.
HSA supporters argue that when individuals pay a portion of their healthcare costs, they are more frugal. Instead of running to the doctor for every cough, cut, or cramp, HSA users, would be encouraged to be more economical with their healthcare spending and possibly even shop about.
They believe they will create a nation of healthy consumers by reducing healthcare costs and injecting price and quality competition into the medical industry. They contend that tax credits will incentivize the uninsured to enroll in lower-cost, high-deductible plans, diminishing the numbers of the uninsured and perhaps nudging them toward better lifestyles.
According to detractors, health savings accounts favor the young and healthy. In contrast, people with chronic medical conditions and the elderly may have to pay more if they pick an HDHP/HSA mix because they tend to drain their money with more frequent up-front medical costs.
This would be true in comparing higher-deductible plans (frequently selected by healthy individuals) versus lower-deductible plans. It’s also worth noting that people with extremely high-cost medical needs may benefit more from an HDHP/HSA combination because the HSA tax savings and lower HDHP premiums much offset the higher deductibles (and “high deductible” is becoming somewhat of a misnomer since most HDHPs have lower deductibles than other plans).
Another objection is that the tax-advantaged alternative is only available to the rich and that low-income families do not earn enough to qualify for the tax breaks. Skeptics also warn that many individuals with HSA plans, particularly the impoverished, may be unwilling to withdraw money from their savings account, even for life-saving medical expenses. Although it is important to save spending on unnecessary care, it is usually difficult for a consumer to discriminate between what treatment is essential and what is not. Skimping on the latter may lead to higher-cost problems later.
However, it is essential to remember that the ACA requires all plans, including HSA-qualified plans, to provide some preventive care at no cost. The IRS issued recommendations in 2013 to bring HDHP standards into accordance with the ACA’s income criterion. As a result, all HSA-qualified plans (beginning January 2014 or later) cover the entire range of recommended preventive care.
How to start with a health savings account?
Enrollees can choose from various banks, credit unions, and brokerage firms that provide accounts for saving and investing in HSA money.
Enrollment in HSA-qualified HDHPs has climbed to 30 million by the end of 2020, encompassing 63 million Americans. Membership in America’s Health Insurance Plans has increased by 15% yearly since 2011. (AHIP). AHIP figures show that 8 million persons were registered in HSAs in 2009, up from 3.2 million in 2006. (It should be noted that HSAs initially became accessible in 2004.) Although not all members contribute to an HSA, they are all entitled to do so.
Many large and small businesses provide these HDHP policies to their workers, but you may also get them through your state’s exchange or a health insurance firm. For individuals who purchase health insurance on their own, HDHPs can be found in almost every country. HSA-eligible plans will be identifiable by an icon or a brief message when purchased through HealthCare.gov or a state-run marketplace. You may also use a search filter to limit the options to only HSA-eligible plans.
How do you use your HSA funds?
Once enrolled in an HDHP, health insurance companies and employers will usually recommend a bank for the insureds to use to open an HSA. At the same time, participants are free to choose any HSA custodian they like.
Suppose you enroll in an HSA through your employer. In that case, you’ll probably have to use the HSA custodian chosen by your employer for your pre-tax payments to be payroll debited and for any donations made on your behalf to be received. However, once the funds are in your account, you can transfer them to another HSA custodian.
Various banks, credit unions, and brokerage businesses provide HSA accounts that can be used to grow and save HSA funds over time. Before choosing a custodian for your HSA account, shop around and compare the offers. Savings accounts come in a variety of forms. And brokerages offer a wide range of stocks, bonds, and funds with low trading fees, whereas others may offer fewer options, are more expensive, and have hidden fees.