The HSA Triple Tax Advantage
Updated: Dec 15, 2019
Health Savings Accounts are available to people who belong to High Deductible Health Plans (HDHP). A participant puts funds into an account to be used for out-of-pocket medical expenses. In 2018, 70% of large companies offered at least one HDHP to its employees. (1)
The major benefit in these plans is that the monthly premiums are much less expensive than other plans, such as Preferred Provider Organization (PPO) insurance. Premium savings can be up to 40% lower than a PPO. (2)
Of course, the drawback is that the participant has a higher deductible to pay for medical services. This deductible must be met when medical attention is needed.
One way to bridge this expense is with an HSA account. Money put into this type account can be withdrawn to pay for medical expenses.
There are many benefits to opening a Health Savings Account. First, any contribution into this account is deductible at pre-tax. That is to say, money put into an HSA is not taxed. Also, because of this pre-tax treatment, a person's total taxable income will go down by the amount put into the account. Secondly, unlike a Flexible Spending Account, money can accumulate in the account year after year. A person does not need to spend the money in the year of contribution. With Flexible Spending Accounts, if the money is not spent in the year contributed, a person loses that money.
In an HSA, a participant can contribute until the age of 65. This is true even if the individual is not employed. (3) If contributions are not made through a payroll deduction, but through a direct payment, this payment is tax deductible.
In all, there are three tax advantages to an HSA. As previously stated, the payroll deduction is made as a pre tax contribution. Next, funds in this account grow on a tax free basis. Finally, if funds are used for qualified medical expenses, there is no tax consequence.
Currently, the contribution maximum limit is $3,500 for an individual and $7,000 for family coverage. (4) If you are over the age of 55, there is a catch up provision available. An individual can put in an additional $1,000 per year into the account. If the spouse is over the age of 55, that person can do likewise. By maxing out the contributions and taking advantage of the catch up opportunity, a family can put into the account up to $9,000 per year.
After the age of 65, Medicare becomes available and your medical expenses are covered by this program. At this point, you can not add any additional money to your account. But you can use this money for living expenses. It becomes like an IRA. Non medical expenses are taxed, but it provides another revenue stream for your living expenses,
If you haven't done so, talk to your HR department about the availability of an HSA at your work.
(1) Society of Human Resources Management: "High Deductible Plans More Common, but So Are Choices" by: Stephan Miller CEBS, February 9, 2018
(2) Society of Human Resources Management: "High Deductible Plans More Common, but So Are Choices" by: Stephan Miller CEBS, February 9, 2018
(3) Investopedia "Retirement Uses for Your Health Savings Account"
(4) Investopedia "Retirement Uses for Your Health Savings Account"