General HR HSA High Deductible HDHP

What's the Deal with Health Savings Accounts?

Jul 11, 2022 9:00:00 AM by Stephen Schram

Health savings accounts are paired with high-deductible health plans for an especially adaptable insurance and savings program. HDHPs have large deductibles that members must meet before receiving coverage. Participants meet those deductibles by contributing their own money to HSAs. The government does not tax these funds as long as they're used to pay for qualified medical expenses.

So basically, an HSA is like a 401(k) for medical expenses. Money is set aside from your paycheck — before taxes — in a savings account used for eligible expenses, which grows tax-free. You can invest a portion of your HSA savings in a variety of investment options.

The best part is that the HSA belongs to you, the participant, not to your employer. When employees leave their jobs for any reason, they still keep their HSA. If you elect to retain your HDHP under COBRA, you may even pay the COBRA premiums from your HSA. Employees can take their money with them if they switch employers or if they change health insurers.

Learn the nuts and bolts

Among qualified medical expenses are medical care, prescription drugs, long-term care premiums, acupuncture, ambulance, contact lenses, labs and X-rays. If participants withdraw funds for anything other than qualified medical expenses, the IRS imposes a 20% penalty. After participants reach age 65, however, the plan essentially works like a retirement account; money comes out taxed as ordinary income, but without penalty. However, this is voluntary. Senior citizens can continue to hold the funds and use them tax-free for qualified expenses.

HSAs can help save money in several ways:

As participants add funds to the account, their contributions reduce their annual taxable income.
The funds withdrawn to pay for qualified medical expenses remain untaxed.
Funds in an HSA account earn interest tax-free indefinitely.
The insurance tends to cost less, as high-deductible plans generally have lower premiums than traditional health plans do.

Know the numbers

Eligibility for HSAs has no income limits, but the HDHP has specified minimum limits for the annual deductible and maximum limits for out-of-pocket expenses. For 2022:

Participants can contribute to an HSA up to $3,650 for self-only coverage and up to $7,300 for family coverage.
An employer may, but does not have to, make contributions to an HSA.
The minimum annual deductible is $1,400 self-only and $2,800 family.
The maximum out-of-pocket limit is $7,050 self-only and $14,100 family.
Those age 55 or older can contribute an additional $1,000 as a catch-up deduction.
Participants can make a one-time transfer of IRA assets to fund an HSAs, although there are limits. Transfers aren't taxable as IRA distributions and aren't deductible.
Participants over age 65 can use HSAs to pay premiums for Medicare Parts A, B and D and Medicare HMO premiums. But participants who enroll in Medicare can no longer contribute to an HSA.

This is just a summary of how HSAs and HDHPs work together. Employees deciding whether they're right for them should consider their own particular situation and options and the costs of their plan options.