The Health Savings Account

Most Americans who go broke annually do so because of medical debt, leading 530,000 families to file for bankruptcy every year.

One reason for this is because health care in America can be extremely expensive, and health insurance coverage, even when offered through employment, is often woefully inadequate.

Another reason is that Americans don’t often save specifically for medical emergencies, with studies showing only 40% of the adult population can cover a $1,000 trip to the emergency room.

A Health Savings Account is one way to supplement your work-based High Deductible Health Plan and cover qualified extra medical costs tax-free. 

What is a health savings account?

Roughly speaking, an HSA is a tax-free savings account you open that pays for a long list of qualified medical expenses your HDHP won’t.

Some examples include dental, vision, prescription medications, physiotherapy, surgery, even flu shots.  HSA coverage was expanded recently to include over-the-counter medications like acetaminophen, sinus medications, diabetes test supplies, insulin, chiropractic care, addiction treatment, acupuncture, hearing aids and batteries, menstrual care products, and more. 

You can even use your HSA to pay for a guide dog.

But Health Savings Accounts have one unbreakable rule: You must be enrolled in a High Deductible Health Plan, or HDHP, to open up an HSA.

Likewise, if you are enrolled in Medicare or find yourself claimed as a dependent on somebody else’s tax return, you can’t open or use an HSA.

But suppose, through your employer or an independent insurance agent, you qualify and enroll yourself in an HDHP. In that case, the insurance plan’s annual deductible for a single person can be no lower than $1,400 or $2,800 as a family. 

The maximum out-of-pocket expense for an HDHP, including deductible, copay, and any coinsurance you might carry, can be no higher than $7,000 for singles in 2021, rising to $7,050 in 2022, and no higher than $14,000 for families. Starting January 1, 2022, the family maximum for an HDHP will top at $14,100.

How does a health savings account affect my taxes?

Employed people with a regular paycheck can allocate and automate pre-tax contributions to their HSA via payroll deductions. 

For those who like a little more manual control, HSA deposits can also be made at will, with the tax deduction claimed later when you file your annual taxes.

Either way, HSA contributions grow tax-free, and no tax is paid when money is withdrawn for qualified medical expenses. 

To recap: HSAs enjoy tax-free contributions, tax-free interest growth, and tax-free withdrawals. These are the most significant advantages of opening an HSA.

How does a health savings account help people save money?

If your monthly premium for family coverage by a non-HDHP insurance plan is $200 more expensive per month than an HDHP, that’s an annual savings of $2,400 when you switch.

For people who are generally healthy and find themselves with no chronic conditions, yearly medical bills might not rise above $600-$1,000 for trips to the dentist, prescriptions, and the like. 

In this case, a $100 monthly HSA allocation, half of what you saved by switching insurance plans, builds up to just under the minimum deductible allowed in one year and then rolls over into the next with no taxes and no penalty for non-use. 

Suppose an unexpected medical emergency comes up and a bill for tens of thousands of dollars slides back down the pipeline. In that case, your HSA can be used to pay out-of-pocket expenses up to the maximum deductible, after which the insurance policy kicks in to cover the rest.

Your HSA belongs to you, moves with you, and can be used for qualified medical expenses as you see fit, as long as your HDHP coverage remains up to date.

However, if you hold an HSA account and lose your health care coverage due to job loss or change jobs and insurance carriers, ALL of your accumulated HSA savings stays with you. You lose nothing from your HSA if you lose your job. Those funds can even be used by people receiving unemployment benefits to purchase COBRA coverage or pay for independent insurance premiums.

If you enroll in another HDHP, your HSA rolls over and picks up right where you left off. If your new employer does not offer an HDHP, your HSA is STILL TAX-FREE for qualified medical expenses, even though you can no longer make contributions.

How to open a health savings account?

Empeople offers a Health Savings Account with no minimum balance and unlimited withdrawals.

There are some restrictions, and it pays to consult with your tax advisor before you commit. But the HSA is only part of a larger strategy, and smart savers know to pay down their debt first and establish an emergency fund to cover at least 3 to 6 months of living expenses before considering a Health Savings Account.

In any case, there is an upper limit to HSA contributions, topping out at $3,650 in combined annual employee-employer contributions for 2022 and $7,300 annually for families next year. For folks over 55 who are not enrolled in Medicare, HSA catch-up rules allow an extra $1,000 per year in both single and family coverage.