Using an HSA to Save on Health Care

nfsphoto/Shutterstock

Many individuals or families opt for a less-expensive, high-deductible health plan (HDHP). The HDHP gives them a lower monthly premium. The downside is there’s a high deductible before benefits apply. This could be a hardship if you have a real need for medical care.

But there’s a way to ease the high deductible pain. Enrolling in a health savings account (HSA) can help you with a high deductible and provide tax savings.

High-Deductible Health Plans Save Premiums

Health insurance premiums continue to increase. In 2023, the average single coverage premium is $8,435 annually. Families are paying $23,968 per year. This amounted to a 7 percent increase from 2022 premiums for families and individuals.

Increases in health insurance premiums are an ongoing trend. The average family premium has increased by 22 percent since 2018.

That’s where HDHPs come into play. They offer individuals and families health insurance for a lower premium than a preferred provider organization (PPO) or health maintenance organization (HMO). In 2022, 29 percent of covered workers enrolled in an HDHP. That’s up from 19 percent in 2012.

The average premium in 2022 for an individual in an HDHP was $7,170 per year as opposed to $7,911. Families paid $21,079 annually for an HDHP instead of $22,463.

But with the lower premium comes higher deductibles. In 2023, to be considered an HDHP, the minimum deductibles are $1,500 for an individual and $3,000 for a family. But there are maximums as well.

The maximum limit is $7,500 for individuals and $15,000 for families. 

Who Should Consider an HDHP?

Those with young children or who are planning on having a baby soon may not want an HDHP. You also may want to look at another plan if you have a chronic condition or participate in high-risk sports. Being able to pay the high deductible is also essential for an HDHP.

But if you’re healthy and rarely sick, an HDHP may be right for you. You’re also a candidate for an HDHP if you can afford to pay the high deductibles. 

And if you want to be eligible for the HSA tax advantages, the HDHP may be right for you.

How a Health Savings Account Works

An HSA offers a tax-advantaged way to save for your medical expenses. You open up an HSA when you enroll in an HDHP. Contributions made to the HSA are pre-taxed. Some employers will also contribute to an HSA. 

Think of an HSA as a 401(k) or individual retirement account (IRA), except the money must be used for medical expenses. An HSA will lower your tax liability just like a 401(k) or IRA.

The Internal Revenue Service (IRS), however, does have a limit on how much you can contribute to an HSA per year. And there’s good news for those planning to contribute in 2024. The amount you’re limited to contribute in 2024 has increased by 7 percent over 2023.

The new limits are $4,150 for an individual and $8,300 for a family.

The funds in your HSA account do not expire. They are also portable funds, so if you change jobs, the money belongs to you and follows you.

You can also carry over HSA funds to the following year. It lasts until you spend it.

These funds, however, can only be used for qualified medical expenses. And when you use the money from your HSA, the withdrawal is tax-free. 

Money used for medical expenses is not considered taxable income. You don’t need to itemize it to receive the tax deduction, but you do need to complete IRS Form 8889 with your income tax return.

If you were to pass, any named beneficiary will be allowed to use the funds for medical expenses. And most insurance premiums cannot be paid through HSA funds.

Qualified Medical Expenses

Generally, any expenses incurred when dealing with a medical diagnosis, treatment, or preventative care are considered qualified expenses. Dental expenses are also included.

After 2019, over-the-counter medicine is considered medical care. It is a medical expense and can be purchased with HSA funds.

Requirements for HSA-Eligible Plans

To take advantage of an HSA, you must participate in an HDHP. This means you must have the minimum or maximum deductible previously stated. You also can’t have other insurance coverage. 

An individual claimed as a dependent on someone else’s tax return is prohibited from participating in an HSA. 

Other ineligible coverages would be:

• health care flexible spending account (FSA) participation
• a spouse’s FSA
• spouses’ family enrollment in an HMO
• enrollment in a non-deductible healthcare insurance
• TRICARE
• Medicare
• receipt of Veterans Affairs (VA) or HIS healthcare benefits within the previous three months

You also may not open separate HSA accounts for minor children.

How HSA-Eligible Plans Lower Costs

By enrolling in an HDHP, you have lower premiums but higher deductibles. With the tax-free HSA, you can pay the higher deductible plus other qualified medical expenses. This includes co-pays, deductibles, coinsurance, etc. 

If you don’t have health problems, this money rolls over to be used at a later date. This allows you to build up reserves.

And since contributions are pre-taxed, you lower your tax liability.

HSA and HDHP an Option to Lower Healthcare Costs

Choosing a higher deductible may save healthcare costs if you’re a healthy individual. An HSA helps you hedge your bets in case there is an illness or accident.

Whether you’re well or sick, you can enjoy the tax savings an HSA allows.

The Epoch Times copyright © 2023. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.