The Benefits of Health Savings Accounts

 
Health savings accounts (HSAs) are tax-advantaged savings accounts that were created to help people save for future medical expenses. You can use an HSA to cover deductible expenses, co-pays, and other noncovered healthcare expenses—for yourself, your spouse, and your dependents.
 
To qualify for an HSA, you must meet these requirements:

• You must be covered under a qualifying high-deductible health plan. High-deductible health plans have relatively low annual premiums, but your insurance doesn’t kick in until you’ve met your deductible, which for 2022 is a minimum of $1,400 for single coverage and $2,800 for family coverage;
• You must not have other health coverage, but you can have dental, vision, disability, and long-term care coverage;
• You aren’t enrolled in Medicare; and
• You can’t be claimed as a dependent on someone else’s tax return.

 
Tax benefits of an HSA — The biggest attraction to HSAs is their triple tax benefit:

• Cash contributions to HSAs are 100% deductible from your federal gross income;
• Interest on savings accumulates tax-deferred; and
• Withdrawals from an HSA for “qualified medical expenses” are free from federal income tax. See irs.gov for qualified medical expenses.

 
Other perks — In addition to tax benefits, HSAs offer other advantages as well:

• Unused funds at the end of the year roll over to the next year.
• You own the account and the money is yours if you change jobs, even if a former employer contributed to your account.

 
Contribution limits — In 2022, eligible individuals with single coverage can contribute up to $3,650 and those with family coverage can contribute $7,300. HSA holders older than age 55 can save an extra $1,000; $4,650 for individuals with single coverage and $8,300 for individuals with family coverage.
 
Your employer can make contributions to your HSA, but total contributions between you and your employer cannot exceed contribution limits.
 
Downsides — Though there are many benefits of HSAs, there are downsides as well:

• If you withdraw funds from an HSA before age 65 for nonmedical expenses, you’ll have to pay taxes in addition to a 20% penalty.
• HSAs are complex and, if not administered properly, can cause adverse tax consequences. Make sure you understand plan details.

 
If you are interested in an HSA, check with your employer to see if it offers a high-deductible health plan with an HSA option. In some cases, the insurance company will open an HSA for you at the same time you select the high-deductible health plan.