Health Savings Account (HSA): A Healthy Choice for Savings
So, what is an HSA? An HSA is a tax- advantaged medical savings account available to taxpayers who are enrolled in a high- deductible health plan (HDHP). An HSA offers three separate tax benefits: (1) The funds contributed to an HSA are not subject to federal tax at the time of deposit. (2) Assets within the account grow tax free. (3) Withdrawals are free of tax if used for qualified medical expenses. An individual can contribute a maximum of $3,400 per year ($6,750 for a family), regardless of income level. To qualify as an HDHP, the minimum deductible is $1,300 for an individual ($2,660 for family), and the maximum out of pocket amounts must be at least $6,550 for an individual ($13,100 for a family).
I have a daughter who will be twenty-seven years old next month, and a son who is twenty-four. As my older children enter the workforce and are eligible for employer sponsored health benefits for the first time, I am often asked for my opinion on what plan they should select. In addition, friends of my wife’s and I, whose children are of similar age, ask for the same advice, which led me to writing this piece. I often recommend a HDHP, supplemented by a Health Savings Account.
Why do I recommend a HDHP? Generally speaking, most younger adults are healthy and have little need for anything more than a low-cost health insurance plan, which are characterized by a high copay, a high deductible and a higher maximum out of pocket limit. And it is necessary to be enrolled in a HDHP to qualify for an HSA.
Employers may offer a payroll deduction for HSA contributions, and may also match employee contributions up to a specific limit. If an HSA plan is not offered by the employer, individuals can open an HSA account at a financial institution (similar to opening an IRA).
In addition to the tax benefits, HSA accounts are not a “use it or lose it benefit”. HSA account balances can carry over from year to year, and continue to accumulate tax free. An HSA can act as a ‘medical emergency fund’, where money will be available should a large medical bill occur. Also, HSA accounts are portable- the employee owns the account, not the employer, so changing employers does not mean leaving an HSA account behind.
An HSA account, in my opinion, should not replace contributions to a retirement account (401K or IRA), but supplement these contributions if the individual can afford to do so.
Feel free to reach out to your wealth advisor if you have any questions.
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