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Answers to 9 questions many people have—from who’s eligible to what costs these accounts can help you cover
WHAT IF YOU COULD GET COVERAGE for your medical expenses as well as tax benefits, while being able to save for your future, all at the same time? By enrolling in a qualifying high-deductible health plan (HDHP) and linking it to a health savings account (HSA), you can have all that. Which may be why, increasingly, companies are offering these accounts as an option for their employees as they plan their health coverage. And people who are self-employed are increasingly considering them as well. “HSAs are intended to help you save pretax, or tax-deductible, dollars to pay for qualified medical expenses—both now and in the future—that aren’t covered by insurance,” says Erin Donnelly, managing director and head of Defined Contribution and Health Benefit Solutions at Bank of America.
Still, many people find HSAs confusing. Here’s some information about them to mull over as you consider ways of funding present and future healthcare costs.
The primary condition for opening an HSA is that you must also be enrolled in an HDHP. For 2021, HDHPs require an annual deductible of $1,400 or more for an individual and $2,800 for a family (unchanged from 2020).1 In addition, for 2021, they need to limit your annual out-of-pocket maximum of $7,000 per individual or $14,000 for a family ($6,900 per individual and $13,800 for a family in 2020) before covering 100% of allowable medical expenses. Even if your employer doesn’t offer an HSA—or if you’re self-employed—you may be able to open an HSA on your own, as long as you’re also enrolled in an HDHP. Keep in mind, in addition to being enrolled in an HDHP, you cannot be claimed as someone else’s dependent and you cannot have disqualifying additional medical coverage, such as a general-purpose health flexible spending account (FSA).
The money you can contribute to these accounts is tax-deductible or pre-tax, and any increase in the value of your account is free from federal taxes—as are withdrawals for qualified medical expenses. “One of the most important features of an HSA is that it’s triple tax-advantaged—when money goes into the account, when it grows and when it comes out,” Donnelly says.2
When making HSA contributions, keep in mind these limits for 2020 and 2021. You may contribute funds for the current tax year up until your federal tax return filing deadline (without extensions). You can put money into an HSA every year that you are eligible, until you enroll in Medicare. After that, you’re no longer allowed to contribute, but you may still use your HSA balance to cover qualified medical expenses with tax-free distributions. Special rules apply to reduce the annual limits in a year you become eligible or cease to be eligible.
A wide range of routine medical costs, including:
"An HSA is triple tax-advantaged—when money goes into the account, when it grows and when it comes out."
There are a number of ways you can tap into the cash in your HSA. While the availability of certain features will differ depending on the provider, some HSAs will give you a debit card or checkbook that you can use to directly pay for qualified medical expenses. With other providers, you might be able to set up a direct transfer of funds from your HSA to your regular bank account to reimburse yourself for qualified expenses you’ve already incurred. You can check with your employer or the HSA administrator to learn about the available options.
No. One of the great advantages of an HSA is that you’re not required to take money out of it by any given date, such as the end of the year—you can save and may even be able to invest your balance until you need it. If you lose your job and continue insurance coverage under COBRA, you can use your HSA to pay your premiums. Another plus: Even if you leave the employer that originally sponsored your HSA, you can roll the balance over to another HSA—one offered by your new employer or an HSA you open yourself.
It varies. Some HSAs function as savings accounts only, while others allow you to invest your contributions in a selection of mutual funds or other investment choices, giving your account the potential to grow. If you’re thinking about making that sort of investment, consider your goals. Do you plan to use the account to pay for everyday health expenses in the short term rather than saving it for future anticipated medical costs? If so, then you may want to keep those funds in cash or investments that offer easy access to cash.
Anticipating that you won’t be using the account anytime soon? Then consider mutual funds or other investment choices that may be more appropriate for the long term. Be aware that your account balance might have to reach a certain amount before your provider allows you to invest it, and you may need to maintain a certain cash balance in your account. Please note that investing in securities involves risks, and there is always the potential of losing money when you invest in securities.
Yes. Starting an account now while you’re in good health, could help you in retirement—when your medical bills are likely to increase. For individuals who are Medicare-eligible (age 65 or older), your HSA can be used to pay for premiums for Medicare Parts A, B or D with tax-free withdrawals, as with other qualified medical expenses. You can even pay for non-qualified expenses, but you will need to pay regular income taxes on those withdrawals. In addition, notes Roger W. Gray, director of Health Benefit Solutions at Bank of America, “You can also use an HSA to pay with pretax dollars for your qualified long-term care insurance premiums.”
An HSA may not be right for everybody. You might prefer to select a health insurance plan with a lower deductible, in which case you wouldn’t be eligible to contribute to an HSA. Or you might, for instance, have other savings priorities—like building a general emergency fund—that leave little room in your budget for funding yet another savings account. Or if you’re young and in good health, you might decide you’d rather devote any spare cash to investing in an IRA or other account dedicated solely to retirement.
But for many others, an HSA can be a useful solution for addressing some of the high costs of health care. “In today’s health-care market, we all need to take a long-term view of health coverage,” Gray says. “If you consider the cost of insurance in combination with the potential savings provided by an HSA, you may be better positioned to meet your medical needs—and possibly have money left over to help you meet your other goals.”
1 In response to the COVID-19 pandemic, Congress passed legislation providing that HDHPs may cover telehealth and other remote healthcare services without a deductible or with a deductible below the minimum annual HDHP deductible for plan years commencing on or before December 31, 2021.
2 Any interest or earnings on the assets in the HSA are tax-free while held in the account. You can receive tax-free distributions from your HSA, including distributions of interest or earnings, to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and, if withdrawn before age 65, death, or disability, may be subject to an additional 20% federal tax. You may be able to claim a tax deduction for contributions you or someone other than your employer makes to your HSA. We recommend you contact qualified tax or legal counsel before establishing an HSA.
Merrill, its affiliates and financial advisors do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
This material should be regarded as educational information on health care considerations and is not intended to provide specific health care advice. If you have questions regarding your particular situation, please contact your legal or tax advisor.