High deductible health plans (HDHPs) have become popular in recent years, especially for those looking to lower their health insurance premium costs. While deductibles may be high with an HDHP, they are typically offered in conjunction with a health savings account, also known as an HSA. Discover what a health savings account is and how it could be beneficial for you below.
What Is a Health Savings Account, and What Purpose Does It Serve?
A health savings account (HSA) allows you to contribute funds to a pre-tax savings account. These funds can then be used for qualified medical expenses as defined by the IRS. Perhaps the most enticing feature of an HSA is that they are not subject to federal income tax at the time of deposit.
You can contribute pre-tax dollars to your account at any time. The funds can then be invested in a similar fashion to retirement accounts, like an IRA. Funds can be withdrawn for qualified medical expenses at any time without getting taxed. For 2021, individual contributions are limited to $3,600, and family contributions are limited to $7,200.1 In 2022, individual contributions will be limited to $3,650, and family contributions will be limited to $7,300.2
And if you’re age 55 or older, an HSA catch-up provision allows you to contribute $1,000 each year.2
Unlike a flexible spending account (FSA), HSA funds that are not used at the end of the year are yours to keep, and an HSA continues to grow tax-deferred. Funds in your HSA aren’t forfeited at the end of the year. Another benefit of health savings accounts is that your health savings account is tied to you as an individual, not to an employer. If you decide to change jobs or health insurance plans, you can take your HSA with you.
Recent Changes for HSAs
The short answer is yes. However, if you are under 65 years of age, any money withdrawn for non-medical expenses will lead to a 20% tax penalty. Once you are 65, you can withdraw the funds for any reason without penalty. This makes it a great option for a secondary retirement account to work in conjunction with a 401(k) or an IRA.
Is an HSA right for me?
In March 2020, legislation was enacted by the federal government, greatly expanding the usage of HSAs.3 This includes the following:
- Telehealth – High-deductible health plans (HDHPs) with an HSA might provide pre-deductible coverage for telemedicine services through December 31, 2021.
- Over-The-Counter (OTC) Medications – HSAs can be used to purchase certain OTC drugs, including aspirin, allergy medications, and pain-related medications without a prescription from a physician.
- Menstrual Care Products – Menstrual products will now be considered qualified medical expenses for HSA payment or reimbursement.
You can use your debit card for these expenses, as there is no required claim reimbursement process.
Can You Cash Out a Health Savings Account?
Yes, you can cash out a health savings account. However, if you are under 65 years of age, any money withdrawn for non-qualified expenses will lead to a 20% tax penalty. Once you are 65, you can withdraw the funds for any reason without penalty.1
Is an HSA right for me?
An HSA may be right for you and your loved ones if you’re enrolled in an HDHP and you’re interested in having the funds that you deposit into your account roll over year after year. In contrast, a flexible spending account (FSA) generally does not allow contributions to roll over, and tends to have a lower contribution limit.
If you’re not interested in or enrolled in an HDHP, a health savings account is probably not the right choice for you.
Finding an HDHP with HSA Option
If you’re looking for a high deductible health insurance plan with an HSA option, HealthMarkets can help you find your ideal plan by comparing the cost and coverage of options from more than 200 national and regional insurance companies.