A Health Savings Account (HSA) is a tax-advantaged medical savings account available to individuals who are enrolled in high-deductible health plans. HSAs have three main tax advantages:
1. Contributions to an HSA are tax-deductible.
2. Assets grow tax free.
3. Distributions from the HSA are tax free if used for qualified medical expenses.
What Medical Expenses are Covered?
Qualified medical expenses include most medical and dental procedures, vision care, prescription drugs, long-term care insurance premiums, and Medicare premiums. However, you cannot use HSA funds to pay for supplemental Medigap insurance premiums or over-the-counter drugs. Note that if distributions are for non-medical expenses, they are subject to income tax.
HSA Limits for 2022
If the high-deductible plan is for an individual, the HSA contribution limit for 2022 is $3,650. If it is for a family, the limit is $7,300. Individuals can contribute to HSAs as long as they are enrolled in high-deductible health plans. However, once they enroll in Medicare, they can no longer contribute to an HSA plan.
How do HSAs Work?
Here’s a hypothetical example that shows how contributing to an HSA today may help decrease expenses later on:
Mark is 45 years old and currently working. He does not incur many health care expenses during the year and can afford to pay for them out of his cash flow. Given that Mark doesn’t incur many health care expenses, he may pay more in premiums for a low-deductible plan. Since his cash flow will cover health care expenses, a high deductible is not an issue. It makes sense for Mark to have a high-deductible plan and to contribute to an HSA. Mark can make tax-deductible contributions to the HSA to pay fewer taxes today, in his high-earning years. Additionally, his HSA is invested and will be tax-free. When Mark retires at 65, he enrolls in Medicare and stops contributing to his HSA. During retirement, he has unpredictable medical expenses, but his HSA has grown substantially. Mark now has a sizable HSA that will pay for most of his out-of-pocket costs tax-free.
Contributing to an HSA may be a great tool to reduce taxes owed today and to save for future health care costs depending on your situation. If you are interested in a high-deductible health care plan, contact your employer’s HR department and ask if a high-deductible plan is an option. Please also feel free to Contact Us to discuss how an HSA may work in your specific situation.
Editor’s Note: This article was originally published in 2018. It has been updated to reflect 2022s limits.