HSAs Make Health Care More Affordable

Tax-advantaged health savings accounts allow you to save for a broad range of short-term and long-term medical expenses.

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A health savings account is a tax-advantaged account designed to help cover out-of-pocket health care expenses. If you’re the account holder, your spouse and dependents may also use the HSA, even if they’re not covered by your medical plan. In 2022, you can contribute up to $3,650 if you have individual health insurance or up to $7,300 for family coverage. If you’ll be 55 or older at the end of the year, you can put in an extra $1,000 in “catch up” contributions.

More than 80% of large employers currently offer an HSA to their employees, according to a recent survey by benefits consultant Willis Towers Watson, but not everyone is eligible to contribute to an HSA. In order to participate, your health insurance plan must offer a high-deductible plan. Typically, the monthly premiums for a high-deductible plan are lower, but you’ll pay more out of pocket before insurance coverage kicks in. For 2022, the health plan must have a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage.

The health plan must also have a limit on out-of-pocket medical expenses that you are required to pay. Out-of-pocket expenses include deductibles, co-payments and other amounts, but they do not include premiums. For 2022, the out-of-pocket limit for self-only coverage is $7,050; it’s $14,100 for family coverage. According to the IRS, only deductibles and expenses for services within the health plan’s network should be used to determine whether the limit applies.

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The Benefits

The tax advantages of HSAs (opens in new tab) are threefold: You can contribute to them on a pretax basis, your savings will grow over time tax-free, and withdrawals are tax-free as long as they are used to cover qualified medical expenses.

HSAs also offer a lot of flexibility. Unlike a flexible spending account for health care, an HSA is not a “use it or lose it” account—the funds won’t disappear if you don’t use them by the end of the year. In fact, you’ll get a bigger benefit from an HSA if you use other cash to pay for current out-of-pocket medical bills and allow the funds in the account to grow. Many HSA plans allow you to invest all or a portion of your contributions in mutual funds, and that offers the potential for more long-term growth than you’ll get if you put all of your contributions in a money market fund or savings account. One strategy is to invest enough money in a low-risk account to cover your current year’s health insurance deductible and invest the rest in mutual funds for longer-term expenses.

Typically, account holders who contribute to HSAs through payroll deductions make regular, fixed contributions throughout the year. However, you’re allowed to change contribution amounts as long as they don’t exceed the maximum contribution limits. This flexibility distinguishes HSAs from flexible spending accounts and health insurance policies, which require you to experience an IRS qualifying event, such as getting married or divorced, in order to make a change during the plan year.

HSAs provide you with an unlimited amount of time after you pay for medical expenses (opens in new tab) to reimburse yourself. If you’re paying medical expenses with cash rather than tapping the account, hold on to the receipts, because you can reimburse those expenses with funds from your HSA at any time—even years after you’ve incurred the expense. In the interim, your funds will grow, tax-free.

Hidden Features

“HSAs help prepare for future health and wealth needs (opens in new tab),” says Patricia Graves, knowledge adviser for the Society for Human Resource Management (SHRM). This is particularly true for retirees. You can’t contribute to an HSA once you sign up for Medicare (at least according to current law; there is legislation pending in Congress that may change that). But after you sign up for Medicare, you can still use the funds tax-free for medical expenses. (After age 65, you can withdraw money for nonmedical expenses without having to pay a 20% penalty, but you will pay taxes on those withdrawals.) Ideally, you should use the money for health care costs, which can be significant in retirement. And the list of eligible expenses is long. Along with deductibles, co-pays and other medical costs that aren’t covered by insurance, you can use the money for vision care, dental costs and hearing aids. HSA dollars can also pay a portion of long-term-care insurance premiums at various limits, depending on the age of the account holder.

HSAs can also help cover the cost of travel essential for medical care. Should you have to travel out of your state for a specific medical procedure, for example, you could use funds from your HSA to cover the cost of a flight or train, or to pay for gas, parking fees and tolls if you drive.

The Coronavirus Aid, Relief and Economic Security (CARES) Act (opens in new tab) enacted in 2020 in response to the pandemic expanded the types of HSA-eligible expenses, and these changes are permanent. Over-the-counter drugs purchased on January 1, 2020, or later are now HSA-eligible without a prescription. Those include pain relievers, cough suppressants, antihistamines and other drugs that treat issues from heartburn to acne. The law also added feminine-hygiene products to the list of expenses that are eligible for HSA funds.

Selecting a Plan

Some companies encourage employees to sign up for high-deductible plans by offering matching HSA contributions. The average employer contribution was $867 in 2021, according to Devenir, an HSA consulting firm. Not all employers offer HSAs, but as long as you sign up for a high-deductible plan, you can open one on your own with a financial institution that provides HSAs. You may also choose to shop around if your employer’s plan comes with high fees or mediocre investment options. (You can compare plans at HSAsearch.com.) But you may sacrifice some perks if you choose that path, says Rich Ward, managing director and head of health solutions at TIAA, an HSA provider. Using an HSA outside your employer’s offering may mean forgoing the convenience of having pretax contributions deducted from your paycheck, he says. In addition, you may not be eligible for matching contributions if you opt for an HSA that’s not offered by your employer.

If you have an HSA through an employer-sponsored plan and lose your job, the account is yours to keep, and you can still use the funds anytime, tax-free, for qualified medical expenses. Although health insurance premiums are typically not considered qualified medical expenses, there’s an exception if you use withdrawals to pay premiums for COBRA coverage (which lets you continue employer-based insurance for up to 18 months after you leave your job) or to pay for other health insurance premiums if you’re collecting unemployment benefits.

New Limits

Because of recent increases in the cost of living, HSA contribution limits (opens in new tab) will rise significantly for 2023. The annual contribution limit for self-only coverage will increase from $3,650 to $3,850, and if you have family coverage, the limit will jump from $7,300 to $7,750. Catch-up contributions for account holders who are 55 or older will be $1,000, the same as in 2022.

Emma Patch
Staff Writer, Kiplinger's Personal Finance

Emma Patch joined Kiplinger in 2020. She previously interned for Kiplinger's Retirement Report and before that, for a boutique investment firm in New York City. She served as editor-at-large and features editor for Middlebury College's student newspaper, The Campus. She specializes in travel, student debt and a number of other personal finance topics. Born in London, Emma grew up in Connecticut and now lives in Washington, D.C.