5 HSA Benefits That Can Save You Money This Year
Key takeaways:
Health savings accounts (HSAs) are tax-advantaged accounts available to people enrolled in high-deductible health plans.
With an HSA, you can set aside money to pay for future medical expenses with tax-free dollars.
Contributing money to an HSA can help you lower your taxable income.
A health savings account (HSA) is a popular way to pay for medical expenses with tax-free dollars. But you must have a high-deductible health plan (HDHP) and meet other requirements to contribute to an HSA. HDHPs come with higher deductibles than traditional health insurance plans, but the benefits of using an HSA can help you offset those costs.
How does an HSA work, and who can open one?
An HSA is a tax-advantaged account that allows you to pay for out-of-pocket expenses that are not reimbursed by your health insurance plan or another health plan. If you use your HSA to pay for qualified medical expenses, your contributions, investment earnings, and withdrawals will be tax-free.
You must have a qualified HDHP on the first day of the month to contribute money to an HSA. For example, if you start a new job and enroll in an HSA-qualified medical plan on September 15, you won’t be eligible to contribute to an HSA until October 1.
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You must also meet the following requirements to contribute to an HSA:
You are not claimed as a dependent on another person’s tax return for the year.
You are not covered by a non-HSA-compatible health plan, like Medicare.
You have not received Veterans Affairs medical benefits at any time during the past 90 days.
What HSA benefits can you use this year?
If you have an HSA-eligible medical plan, here are five benefits you can take advantage of this year.
1. Make pretax contributions
An HSA can help you lower your taxable income for the year. If your job offers an HSA with your HDHP, your contributions to the HSA are pretax. Here’s how it works:
Your contributions into the account will be deducted from your gross income.
The contributions are deposited into your HSA before taxes are withheld from your paycheck.
Every dollar that you contribute to the HSA will reduce the amount of federal taxes you pay.
For example, if you earn $80,000 annually and contribute $3,850 to your individual HSA, your taxable income for the year would be $76,150.
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There are limits to the amount you can contribute to an HSA every year. For 2023, you can contribute up to $3,850 for individual HSA coverage and $7,750 for a family plan. If you are 55 or older, you can contribute an additional $1,000 to an account, which is known as a catch-up contribution.
2. Pay for qualified medical expenses
You can use your HSA to pay for IRS-approved medical expenses with tax-free dollars during the year. Here are some expenses you can use HSA funds for:
Band-Aids
Ultrasounds
X-rays
If you have a letter of medical necessity (LOMN) from your healthcare provider, you may be able to use your HSA funds to cover additional expenses, including:
The IRS provides the rules for qualified medical expenses in Publication 502, Medical and Dental Expenses. Before making a purchase, you can contact your HSA custodian to confirm if an expense is eligible.
3. Explore options for investing HSA funds
Unlike with a flexible spending account (FSA), you may be able to invest the funds in your HSA. Contact your HSA custodian to determine the following:
The minimum balance required to start investing the money in your HSA
The type of assets you can invest your HSA dollars into
Typically, companies will allow you to invest your money in traditional assets, including:
Bonds
Exchange-traded funds
Stocks
Mutual funds
If your investments grow, your earnings will be tax-free. This allows you to increase the balance in your HSA beyond what you can contribute annually.
4. Rollover unused funds
You can contribute money to your HSA every year, but you don’t have to use the funds in your account immediately. If you end up with unspent funds in your HSA, you can roll over the remaining funds to the next plan year. This makes it possible to accumulate a large HSA balance that you can use to pay for future healthcare expenses.
The funds in your account don’t expire. Even if you enroll in Medicare, you can still use the funds in your HSA to pay for qualified medical expenses. And at age 65, you’ll be able to use the funds to pay for nonqualified expenses without incurring penalties. You’ll just have to pay taxes on the funds you withdraw.
5. Employer contributions to your HSA
If you contribute money to an HSA this year, your employer may also contribute money. This benefit may be part of your company’s wellness incentives. Check with your company’s human resources department to find out if your employer contributes money to your HSA and how much so you can take advantage of the benefit.
Employer contributions to your HSA reduce the amount you have to contribute toward your healthcare costs. And you won’t be responsible for paying taxes on this money.
Employer contributions to your HSA may be excluded from your gross income.
How do you open an HSA?
If your job offers an HSA, you can open an account through your employer during the open enrollment period. If you’re self-employed, you can open your own account at a:
Bank
Credit union
Insurance company
Before you open an HSA, ask about:
Setup fees
Initial deposit requirements
An HSA debit card
Withdrawing HSA funds
Minimum amount needed to invest the money in your account
Types of assets you can invest your HSA funds in
How is an FSA different from an HSA?
Flexible spending accounts (FSAs) and health savings accounts (HSAs) are both tax-advantaged accounts that allow you to pay for qualified medical expenses. Depending on the type of health plan you have and your medical needs, one account may be better suited for you than the other.
An FSA is an employer-sponsored plan that gives you a limited time to use the funds in the account. If you have a preferred provider organization (PPO) or other traditional health plan, you can gain access to an FSA.
Unlike an FSA, an HSA allows you to roll over money every year and invest your funds in different assets. Your money can grow over time and be used during retirement. An HSA comes with appealing, triple tax benefits, but you must have a HDHP to be eligible to contribute to an account.
The bottom line
If you have a health savings account (HSA), it’s important to review your benefits to make the most of your account. You can contribute money to your account, invest your funds, and withdraw money to pay for qualified expenses tax-free. If you don’t need to spend the money in your account this year, you can roll over the funds and use them to pay for future healthcare costs.
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References
Internal Revenue Services. (2021). Publication 502 (2021), medical and dental expenses.
