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ABCs of HSAs

Megan Pacholok, Morningstar analyst
Oct 20, 2021

As open-enrollment season approaches, you may be considering a high-deductible healthcare plan with a health savings accounts or, as they are more commonly known as, an HSA. Well, what is a high-deductible plan? How can you use your HSA? What are the benefits and the limitations? And what is the “triple tax advantage” everyone talks about with HSAs?

Let’s take a look.

A high-deductible health plan is a type of health insurance plan that offers lower premiums in exchange for higher deductibles compared to other types of healthcare plans.

A health savings account, or HSA, is a tax-advantaged vehicle to save for qualified medical expenses. They are available to people enrolled in high-deductible healthcare plans.

Of course, there are some conditions to qualify for an HSA and some limits to keep in mind:

First, to qualify for an HSA, your high-deductible healthcare plan must have a deductible of at least $1,400 for an individual coverage or $2,800 for family coverage.

The high-deductible health plan’s annual out-of-pocket expenses, including deductibles but not premiums, cannot exceed $7,050 for self-coverage and $14,100 for family coverage.

Finally, HSA participants have annual contribution limits. Those covered by an individual plan can contribute up to $3,650, while those covered in a family plan can contribute up to $7,300.

Note, if offered, employer contributions do count toward these maximums. Also, individuals over the age of 55 can save an additional $1,000 each year.

Unlike a flexible spending account, there is no limit as to how much money can be rolled over from year to year in an HSA, providing the opportunity for accountholders to accumulate significant HSA assets.

As for the “triple tax advantage” that HSAs offer? That means that HSA contributions go in tax-free, money grows tax-free, and then can be withdrawn tax-free as long as it is spent on qualified medical expenditures.

As a result, the tax benefits of an HSA outweigh what is offered by a 401(k), a traditional IRA, a Roth IRA, and a 529 college-savings plan.

It is important to remember that funds withdrawn for nonhealthcare expenses are taxed at the accountholder’s marginal tax rate. And if HSA dollars are withdrawn before the age of 65, the funds are subject to an additional 20% penalty.

What happens to your HSA if you leave your job? Well, HSAs are tied to the accountholder and are independent of the workplace, although workers must be currently enrolled in a high-deductible health plan in order to contribute to one. But workers can open and maintain an HSA outside of their employer-provided one if it better fits their financial goals.

That’s our quick look at HSAs. Of course, whether or not it will work for you is up to you.

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