Navigating health insurance can be complex, but Health Savings Accounts (HSAs)—which are made available through High Deductible Health Plans (HDHPs)—can offer valuable benefits. Curious about how these tools work together to provide financial savings and comprehensive coverage? Wondering how to maximize their advantages in your financial strategy? Utilizing both an HSA and HDHP may be just the thing that helps you.
What is a Health Savings Account?
An HSA is a tax-advantaged savings account that an individual can contribute to if they are enrolled in an HDHP. An HSA enables you to set aside pre-tax money to pay for qualified medical expenses. These qualified expenses include deductibles, co-payments, coinsurance, addiction treatment and more.
As noted earlier, an individual must be enrolled in an HDHP in order to qualify to make contributions to an HSA. An HDHP is considered a “catastrophic” health coverage that pays benefits only after meeting a high annual deductible. Some medical expenses, such as routine physicals, might not go towards the deductible and instead will be covered by the insurance company.
2024 HDHP requirements
In 2024, the minimum annual deductible for an HSA-qualified HDHP is:
Your deductible may be higher based on the plan you are enrolled in. In addition, qualifying HDHPs must limit annual out-of-pocket expenses (including deductibles) and for 2024 those limits are:
Once you reach this limit the HDHP will cover medical costs as outlined in your policy.
Contributing to an HSA
In an HDHP, you are responsible for a greater portion of healthcare costs which results in the premiums for coverage typically being lower than traditional healthcare plan premiums. The lower premium plus an HSA allows individuals to capture those savings and build a way to pay qualified medical expenses with pre-tax dollars. Contributions may be made through payroll deduction or directly to the HSA. Employers may offer programs or incentives where they will contribute to your HSA account.
An HSA is a powerful savings tool as the money invested can grow tax deferred. When used for qualified medical expenses, it can be pulled out without any tax implications. Due to this, there are annual contribution limits associated with HSAs, which in 2024 are:
For those who are 55 and older, catch-up contributions can be made, allowing for an additional $1,000 in contributions each year.
Withdrawing from an HSA
There is no “use it or lose it” provision associated with HSAs. Each year, the balance of the account will roll over and allow for continued tax-deferred growth of the account. In addition, these accounts are portable and are wholly owned by the individual. There is no vesting.
Generally, participants will pay for medical expenses during the year until they reach their annual deductible. You can receive tax-free distributions from an HSA in order to pay (or be reimbursed) for qualified medical expenses. If you take money out of an HSA for a non-qualified expense, you can do so with a 20% penalty on top of having to pay normal income taxes.
There is an extensive list of qualified medical expenses produced by the IRS that details what you are allowed to pay for from your HSA without penalty. A full list of qualified medical expenses can be found at irs.gov under Publication 502. Some better-know qualified expenses include prescription drugs, eyeglasses, deductibles and some insurance co-payments.
Tax advantages of an HSA
HSAs offer a variety of tax advantages that account holders can utilize. One of the most significant benefits of HSAs is the triple tax advantage: tax-deductible contributions, tax-free growth and tax-free withdrawals for qualified medical expenses. This combination makes an HSA one of the most tax-advantaged savings vehicles available. Additionally, HSAs are extremely portable and are fully owned by the individual for whom they are set up. This means that funds can be rolled over to another HSA tax-free if done within 60 days of withdrawing the funds from the original HSA.
An HSA after 65
Once an individual who owns an HSA account turns 65, the 20% withdrawal penalty for nonqualified expenses goes away. In addition to the lack of penalty, once an individual reaches the age of 65, they are no longer able to contribute to their HSA account. You can still take withdrawals from your HSA with no income tax on those withdrawals if the expense is considered a qualified medical expense.
You are also able to pay some Medicare premiums such as Medicare Part B, Part D and Medicare Advantage premiums. Not included in this is any coverage meant to supplement Medicare such as Medigap coverage.
In the event of the death of an HSA owner, if the HSA is transferred to the spouse, it remains an HSA with no changes. The new owner can continue to use the HSA as it had been previously utilized. However, if the HSA does not transfer to a spouse, it ceases to be an HSA. The account is then taxed at its fair market value to the beneficiary in the year of the original owner's passing.
The HSA is a valuable planning tool. If you have access to one, make sure you take full advantage of funding and any contributions your employer may make. The tax-free withdrawals for paying qualified medical expenses extending into your retirement can be a great boost to your overall long-term financial security.
As you plan for the future, the experienced advisors at Busey Wealth Management are here to help. To learn more about our holistic services or to find an advisor near you, please visit busey.com/wealth-management.
This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.