Should I enroll in a Health Savings Account?
As open enrollment is upon us for the year, we thought it would be helpful to remind everyone what a Health Savings Account is all about. A health savings account (HSA) is a tax-advantaged account linked with a high-deductible health plan (HDHP). They work together to help you cover your current health-care costs and also save for your future needs.
Tax trifecta
HSAs offer several tax benefits:
Pre-tax contributions can often be made through an employer via payroll deduction, or you can make contributions yourself and take a tax deduction whether you itemize or not. Either way, HSA contributions reduce your income tax for the current year.
Investment earnings compound on a tax-deferred basis inside the HSA.
Withdrawals are tax-free if the money is spent on qualified medical expenses.
Contribution rules
The maximum HSA contribution limit in 2020 is $3,550 for individual coverage or $7,100 for family coverage. This annual limit applies to all contributions, including those made by you, your family members, or your employer. You can contribute an additional $1,000 starting the year you turn 55. Once you sign up for Medicare, you can no longer contribute to an HSA.
Funds roll over from year to year and are portable, which means they are yours to keep. You can make 2019 contributions up to April 15, 2020.
Pros and cons
To be eligible to establish or contribute to an HSA, you must be enrolled in a qualifying high-deductible health plan - with a deductible of at least $1,400 for individuals, $2,800 for families in 2020. Qualifying plans also have out-of-pocket maximums, above which the insurer pays all costs. In 2020, the upper limit is $6,900 for individual coverage or $13,800 for family coverage.
With high deductible health plans, HSA owners are forced to pay attention to prices for their medical needs. So they may select lower-cost providers and could be more likely to avoid unnecessary spending. On the other hand, some people with HDHPs might be reluctant to seek care when they need it, because they don't want to spend the money in their account. A high deductible can make it difficult to pay for a costly medical procedure, especially if there hasn't been much time to build up an HSA balance.
Premiums are typically lower for HDHPs than traditional health plans. Until the deductible is satisfied, members usually pay more up-front for services such as physician visits, surgery, and prescriptions, but typically receive the insurer's negotiated discounts.
Some preventive care, such as routine physicals and cancer screenings, may be covered without being subject to the deductible. Under new IRS guidance issued in July 2019, the list of preventive care benefits that HDHPs may provide was expanded to include certain medications and treatments for chronic illnesses such as asthma, diabetes, depression, heart disease, and kidney disease. Providing this coverage encourages patients to seek care before problems become more serious and costly.
Retirement strategy
Another HSA benefit is that they can be used for Medicare premiums and qualified long-term care insurance premiums and services that you may need later in life.
If you can afford to fund your HSA generously while working, some of those dollars could be left untouched to accumulate for many years. You could even pay current medical expenses out of pocket and preserve your HSA assets for use during retirement. But save your receipts in case you have an unexpected cash crunch. You can reimburse yourself for eligible expenses at any time.
Compare carefully
Open enrollment is the time of year when employers typically introduce changes to their benefit offerings. If you purchase your own health insurance, you might also be presented with new options for 2020. The bottom line is that choosing and using your health plan carefully could help you save money. If you choose an high deductible health plan, make sure to contribute the premium dollars you are saving to your HSA, and more if you can.
Before you sign up for a specific plan, read the policy information and look closely for any coverage gaps or policy exclusions, consider the extent to which your prescription drugs are covered, estimate your potential out-of-pocket costs based on last year's usage, and check to see whether your doctors are in the insurer's network.