12 Essential Facts You Should Know About A Health Savings Account

1. A Health Savings Account (HSA) is not a Flex Spending Account (FSA): This is one of the most common misconceptions we hear from clients. Both accounts allow for pre-tax contributions for qualified, eligible medical expenses on a tax-free basis, but that is where their similarities end.

2. An HSA account is used with a qualified high-deductible health insurance plan: This is a "barrier to entry" for an HSA, which means that your employer has to offer a qualified high-deductible health plan for you to be able to contribute. Conversely, an FSA is used with a low-deductible health insurance plan. Many employers offer both options, and the high-deductible health plans have come a long way, offering out-of-pocket maximums equal to or even less than the low-deductible health plans.

3. The annual contribution amounts are higher with an HSA than an FSA, allowing you to stuff more into these accounts each year. Let's take a look:

Note: If you are 55 or older, you can contribute an extra $1,000 to your health savings account.

4. An HSA does not fall under the "use it or lose it" rule like an FSA account. If you don't need to use your HSA funds, they can continue to grow tax-deferred and then be distributed tax-free if used for qualified, eligible medical expenses. FSA funds must be used, or they are forfeited, although there is a 2.5-month grace period in the new year, and up to $610 of unused funds can be carried forward for use in 2024 if not used in 2023.

5. An HSA is the most tax-favored account you can save into at this time (3 x Tax Benefits), even more tax-favored than Roth IRAs (2 x Tax Benefits). Your contributions are tax-deductible + earnings grow tax-deferred, + distributions are tax-free if used for qualified, eligible medical expenses.

6. HSA funds can be invested long-term: If you want to get the "biggest BANG for your buck," investing your HSA funds for your future healthcare expenses and paying out-of-pocket medical expenses from your cash flow is the ultimate maximization of this tax-favored account. Of course, not everyone can do this, but even planning to invest half your contribution each year can go a long way.

7. You can still participate in a limited FSA with an HSA: Some employers offer a limited FSA for dental and vision costs. These funds still fall under the "use it or lose it" rule, but depending upon your total expected healthcare costs can be a great way to maximize the tax benefits of a fully funded HSA and a limited FSA.

8. Health savings accounts have greater funding flexibility: You have until the tax filing deadline to fund your HSA for the prior tax year. 

9. Health savings accounts go with you when you leave an employer: If you leave your employer, your HSA can go with you, whereas with a flex spending account, any unused funds are given up unless you qualify for COBRA.

10. Extra tax savings benefits for adult children under age 26: Say what? Suppose you have an adult child that qualifies to be on your family's high-deductible health plan and also qualifies not to be claimed as a dependent on your tax return. In that case, you can contribute the family maximum to your HSA, and your adult child can contribute the maximum family amount to their own HSA!

11. Medicare and HSAs don't mix: Once you elect Medicare, you can no longer contribute to an HSA. This is an essential consideration for someone working beyond age 65 with a high deductible health plan + HSA option. Therefore, working with a professional to evaluate the cost differences between your high deductible health plan + HSA savings account versus Medicare is vital to confirm your best option.

12. HSA funds can be used to pay Medicare and long-term care insurance premiums. Having a plan in place for potential future long-term care events is critical. Long-term care insurance is one way to protect against a long-term care event, and long-term care premiums do qualify as eligible medical expenses from an HSA. Medicare premiums (all) also qualify as eligible medical expenses from an HSA account.

We can't stress enough that healthcare costs are the "wild card" expense in retirement, so we inflate these expenses at a much higher rate in our forward-looking financial planning projections. Therefore, planning and saving for these costs as early as possible is critical. If you can participate in an HSA account and need help understanding the benefits, reach out to us, and we can review your options with you.

Resources: 

https://www.irs.gov/publications/p969

https://www.kitces.com/blog/health-savings-accounts-hsa-dependents-children-age-26-hdhp-taxes-contribution-limits/#:~:text=Which%20means%20that%20multiple%20family,accounts%20(%247%2C300%20in%202022%2C

https://www.medicare.gov/basics/get-started-with-medicare/medicare-basics/what-does-medicare-cost

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