Many employers today are offering high-deductible health insurance plans along with health savings accounts (HSAs). The downside is the high deductible – the amount you must pay out-of-pocket for covered medical expenses before your health plan kicks in. Nevertheless, HSAs have a number of benefits for employees.
How Does a Health Savings Account Work?
An HSA is a medical savings account that is only available when you are enrolled in a qualified high deductible health plan (HDHP). For 2023, the minimum deductibles set by the IRS for a plan to qualify are $1,500 for an individual and $3,000 for a family. Most HDHPs are combined with HSAs, funded by pre-tax dollars, which are typically deposited in an employee’s account through payroll deduction. Employees can use money in their health savings accounts to pay for copayments, coinsurance, deductibles, and other qualified medical expenses. When used for other purposes by an employee under the age of 65, HSA funds withdrawn are subject to taxes and penalties.
How Do Employees Benefit from Health Savings Plans?
When combined with high deductible health plans, HSAs benefit employees in several different ways:
Save on Taxes
Employee contributions to health savings plans are deducted on a pre-tax basis. They lower your taxable income, so you may pay lower income taxes. Withdrawals from an HSA that are used for eligible medical expenses are not taxable.
Cover Out-of-Pocket Medical Expenses
You can use your health savings account funds tax-free to pay deductibles, copays, and coinsurance. You can also use them for some healthcare costs your health plan does not cover. Examples may include contact lenses, eyeglasses, dental care, and orthodontia.
Get More out of Your Money
Money you put into a health savings account earns tax-free interest. Any portion you do not use within the plan year rolls over into the next year. You have the option to either spend HSA funds on qualified healthcare expenses or to save them to invest in the future. Typically, when you maintain a certain account balance, you can invest a portion of your health savings funds in stocks, bonds, or mutual funds.
Save for Retirement
HSAs can be used as retirement savings accounts. Once you turn 65, you can use these funds for any purpose without penalty. HSA money used for qualified medical expenses continues to be tax-free.
Control Your Own Funds
With a health savings account, you are in control of your own money. You decide how much to save and how to spend it, within limits. For 2023, the IRS has set limits for employer + employee contributions to HSAs at $3,850 for an individual and $7,750 for a family. The money you put into an HSA is yours forever. It never expires and you can take it with you if you change jobs or enroll in a different high deductible health plan.
Health savings accounts combined with high deductible health plans are part of the group benefits packages offered by many employers. Our friendly agent can help you decide if an HSA is right for you.