There are many factors to consider when deciding if an HSA is a good option. HSA's offer protection, potential savings, tax advantages, and access to options / flexibility.
- First... What is an HSA? Created in 2003, to provide individuals with a tax-preferred method of putting money aside for medical expenses. The money and HSA both belong to the employee, meaning that they are portable even if the employee goes to work somewhere else or leaves the work force. The IRS guidelines for HSAs give specific rules.
- HSAs are paired with High Deductible Health Plans (HDHPs) and provide tax advantaged savings.
- The money from an HSA can be used TAX FREE when paying for qualified medical expenses. This money is often used if needed to pay the HDHPs larger deductible.
- Contributions made by employees are tax deductible.
- The interest on the assets in the account are tax free.
- Any money that's not spent by the end of the year is kept in the HSA and rolls over. This money grows as TAX DEFERRED investment earnings
Tax Free - AKA "Tax Exempt". This is money that is not taxed.
Tax Deferred - Investment earnings that accumulate tax free, but are taxed when the investor takes receipt of the money
Tax Deductible - is a portion of taxable income that may be excluded from taxation when certain conditions are satisfied
What is a qualified medical expense? There is a list of eligible medical expenses by the IRS - but expenses range from nursing home expense to special education, weight-loss programs, to expenses incurred from travel and trips to other cities for medical services. The employee, spouse, and dependents (who are claimed on tax return) can be included in these medical expenses when it comes to HSA eligibility.
- Who is eligible for an HSA?
- Must be on an HSA eligible HDHP plan, and aren't enrolled in Medicare,
- Are not claimed as a dependent on someone else's tax return,
- Who can contribute to an HSA?
- The employee, the employer, or family member (or combination thereof).
- What are the Annual Maximum Contributions?
- The maximum contribution for an individual for 2022 is $3,650.
- The maximum contribution for a family for 2022 is $7,300.
- Can insurance premiums be treated as qualified medical expenses?
You can’t treat insurance premiums as qualified medical expenses unless the premiums are for any of the following: 1) Long term care insurance, 2) Health care continuation coverage (such as COBRA), 3) Health care coverage while receiving unemployment compensation under federal or state law, 4) Medicare and other health care coverage if you were 65 or older (other than premiums for a supplemental policy, such as Medigap).
- HSA Advantages for Employees:
- Flexibility - Employees can use the HSA to pay for current medical expenses like deductibles or future medical expenses
- Savings - Some employees see this as a way to save money with tax deferred growth, and also save money by having a higher deductible plan to lower monthly health insurance premiums.
- Tax Savings - HSAs provide triple tax savings
- Tax free earnings through investment
- Tax free withdrawals for qualified medical expenses
- Tax deductions when an employee contributes to their account
- Control - to decide how much money to contribute to the account, when to contribute, to use the money for current expenses or future expenses, how to invest the money in the account, and the ability to port the HSA if the employee changes jobs, changers medical coverage, becomes unemployed, or moves to another state.
- It should be noted that the funds remain in the account from year to year. There are no "use it or lose it" rules for HSAs