Is a health savings account right for you? When researching health insurance options, you’ve likely heard about how health savings accounts, also known as HSAs, can help you save money on your healthcare expenses.
HSAs are a helpful complement to your primary health insurance policy that makes it easier to plan ahead and decrease your out-of-pocket healthcare costs. However, these special accounts do have a few considerations to keep in mind before you sign up for open enrollment in 2024 and beyond. Exploring the ins and outs of HSAs will ensure you make the right choice for your situation so you can take care of your health without stressing your finances.
What Is a Health Savings Account (HSA)?
So, what is an HSA, and how does an HSA work? A health savings account is a tax-advantaged savings account that you use exclusively for your healthcare needs. You pay into your HSA with pre-tax money directly from your paycheck, so you can avoid paying income tax on those funds. Once the money is in your account, you can use it for a variety of medical expenses, including dental work, copays, and medications.
Many employers offer HSAs for employees, and you may also be able to set up an HSA on your own or through your insurer. Regardless of where you set up your account, however, you need to make sure your policy is a qualifying high-deductible health plan (HDHP).
The Role of High-Deductible Insurance Plans in Your HSA
HSAs are designed to help people who have limited coverage and can’t afford health insurance from traditional policies, so you can only sign up in tandem with an HDHP. As the name implies, high-deductible health plans are healthcare policies that have a deductible that’s higher than average. They often have lower monthly premiums, but you’ll have to pay a higher amount on medical costs before your coverage kicks in. For example, if you have a $2,000 deductible, you’ll need to spend $2,000 out of pocket before your policy will start helping you out with copays and offering other benefits.
HSAs were created as a complement to HDHPs to ease this financial burden. If you contribute to an HSA, you can use those pre-tax dollars to pay for your healthcare costs. So, instead of having to pay your entire $2,000 deductible with no assistance, you can use the pre-tax money you’ve saved up in your HSA.
HSA-eligible HDHPs need to meet a few key requirements from the IRS. Namely, the deductible must be more expensive than the typical plan. Currently, the minimum annual deductible is $1,600 for individuals and $3,200 for families. Your HDHP also needs to have a maximum out-of-pocket cost of $8,050 for an individual and $16,100 for a family.
Making the Most of Tax Benefits
At first glance, using an HSA may not seem that beneficial. After all, you’re still funding your HSA with your paycheck. However, the tax benefits of your HSA can quickly stack up, making your medical expenses much more manageable.
The Triple-Tax Advantage of Your Health Savings Account Explained
Because you can put pre-tax funds into your account, you can enjoy several tax benefits. These ripple effects can maximize your savings and help you get the most out of each dollar:
- Deposits into your HSA are tax-deductible, so you won’t be taxed on the income you put into your account.
- Any interest your HSA accrues is tax-deferred, so you can grow your balance without having to pay extra interest.
- Withdrawals are completely tax-free as well, as long as you use the funds for qualified medical expenses.
Understanding Contribution Limits
There is a limit to how much you can put into your account each year. For 2024, the limits are $4,150 for an individual policy and $8,300 for a family policy. Starting in 2025, the limits will increase to $4,300 and $8,550, respectively.
This limit includes both personal contributions and any contributions from your employer. For example, some employers may help fund your account as an employee perk. If they contribute $1,000 per year for 2025, you’ll be able to add a maximum of $3,300.
If you’re 55 or older, you can also make an additional “catch-up” contribution of up to $1,000, so you could contribute up to $5,300 as an individual and $9,550 to a family plan for 2025.
Advantages vs. Disadvantages of HSAs
Along with the helpful tax implications, these specialty savings accounts have several benefits for managing your medical expenses successfully. The following is a breakdown of the pros and cons.
Weighing the Pros: Why HSAs Are a Smart Choice
HSAs have several clear benefits. The funds roll over year after year, so if you don’t spend your contributions right away, you can build a helpful safety net for major medical expenses down the line. You can keep your plan as you move from job to job, and you won’t ever be subject to mandatory distributions, even after you retire.
Additionally, setting up an HSA along with an HDHP can keep your monthly healthcare costs low, especially if you’re currently in good health. Compared to HDHPs, traditional insurance plans often have higher monthly premiums, which can put a strain on your day-to-day budget. HSAs and HDHPs can keep health care costs low each month and allow you to save up for future medical expenses as you age.
Potential Cons and Challenges of Having an HSA
High deductible plans have several drawbacks, and you need an HDHP to qualify for an HSA. If you have complex medical needs, it may be hard to predict your healthcare budget, so you may actually spend more on a high-deductible plan. If you use up your entire HSA each year to pay for your medical costs, there won’t be anything to roll over and save up. As a result, it may be cheaper to opt for a traditional plan. Additionally, you can’t qualify for an HSA if you’re currently covered by Medicare.
Misusing your account can also have some major financial consequences. If you use your funds for a non-covered reason, you’ll lose your tax benefits and may also have to pay an extra fee. You’ll have to carefully track how you use your benefits to avoid these costly tax penalties.
Spending HSA Funds Intelligently
During open enrollment, you can sign up for HDHPs and HSAs through Covered California or another state marketplace. Afterward, you’ll need to make sure you use your benefits appropriately. At Freeway Insurance, we have agents who can walk you through the benefits and challenges of choosing an HSA. This is a free service. Just call us during open enrollment at 877-930-1317 to find out if you qualify for free or low cost health insurance in California or to work through setting up an HSA.
Qualifying Medical Expenses: What’s Covered?
Before you start swiping your HSA card, it’s important to double-check your benefits. Qualifying expenses can vary by plan, but they are pretty comprehensive. Here are just a few examples of costs that can qualify:
- Over-the-counter medications
- Prescription medications
- Doctor’s visits, including copays
- Tests and scans
- Glasses and contacts
- Dental work
- Chiropractic and acupuncture appointments
- Mental health treatment
- Physical therapy
- Non-elective surgery
- Mobility aids like wheelchairs and walkers
If you’re not sure if a bill is covered, check your policy documents. They will include a breakdown of all qualifying costs.
Get a Free Health Insurance Quote from Freeway
When you set up an HSA, you’re unlocking a variety of benefits that can make your medical needs more affordable. Thanks to tax-free interest, you’ll be able to save on tax money for your short-term healthcare needs or start building up a nest egg for future expenses. By thoughtfully saving and spending your HSA funds, you can make your high-deductible policy more affordable without increasing your premiums.
If you think an HSA might be right for you, the team at Freeway Insurance can help you get started. They’ll walk you through eligible HDHP plans and set you up for success with your new insurance savings account. Start planning today by visiting a local Freeway Insurance office, getting an online quote, or calling an agent at 800-777-5620. During open enrollment in California, call us at 877-930-1317.
