First launched in 2003, HSAs were created as a way to help consumers cover future medical costs with tax-free savings while helping employers reduce rising health care costs. Only those enrolled in high-deductible health plans can open HSAs. There are other requirements too. Account holders can’t be claimed as a dependent on someone else’s income tax return, can’t be enrolled in Medicare, and can’t have other health care coverage except what is determined by the IRS as “permissible coverage.”
Unlike flexible spending accounts, which operate under a use it or lose it rule, HSA balances can be rolled over each calendar year. For 2018, the IRS maximum annual HSA contribution for individuals is $3,450. For families, the 2018 maximum contribution is $6,900. Those over the age of 55 are allowed to contribute an additional $1,000 per year.
According to SHRM research, 65% of large employers include a high-deductible health plan (HDHP) as part of their employee benefits. Many consumers are opting for HDHP plans due to their low premiums, despite the tradeoff of higher deductibles. In 2018, SHRM estimates HDHP deductibles will average at least $1,350 for individuals and $2,700 for families. In addition, individuals on HDHP plans can expect to pay out of pocket expenses up to a maximum of $6,650 annually; families could pay up to $13,300 annually.
Healthcare costs are a top concern for retirees, and some say HSAs could provide some relief. But not so fast. Morningstar research found that very few retirees are putting away the maximum amount allowed for HSAs per year. Because of the tax benefits, that’s like leaving money on the table. Morningstar suggests workers nearing retirement plan out how they can best use their HSA benefit for current medical expenses and supplemental savings for medical expenses in their retirement.
Here are some other considerations.
Free preventative care: To encourage users to take care of their health, most annual checkups and preventative screenings are usually free under HDHPs.
Have HSA, can travel: HSAs are portable. No need to stress that you’ll lose your contributions when you get a new job, because you can roll over your HSA and access your funds with your existing debit card for qualified expenses.
Tax breaks: Because the funds roll over each year, you can keep money in your HSA as a way to save for future medical expenses, and the account’s earnings grow tax-free. HSA contributions can also be deducted from your paycheck and you don’t have to pay taxes on withdrawals for qualified medical expenses like deductibles, prescription medication, co-pays and more. Always verify what counts as an eligible medical expense, or you could end up paying a 20% penalty on top of the income tax you’ll owe on the amount that was spent.