Due to the rising cost of health care expenses, many employers have included High Deductible Health Plans (HDHP) in their benefit programs. A High Deductible Health Plan usually has a lower monthly premium than a traditional health insurance plan. However, the deductibles for this type of plan start at $1,400 for an individual or $2,800 for a family. To offset this cost, participants in these plans usually have the option to save their own money through a Health Savings Account. So, what are Health Savings Accounts and how do they work?
A Health Savings Account (HSA) is a savings account into which individuals can contribute money on a pre-tax basis to pay for qualified medical expenses. This type of account is said to have a “Triple Tax Advantage” which makes opening and funding one very attractive. The first advantage is that deposits into the account are exempt from Federal Income Tax. In addition, any investment gains and interest inside the account are not taxable. Lastly, if the funds are ultimately used to pay medical expenses, then the withdrawals from the account are also non-taxable. HSA annual deposits for 2020 are limited to $3,550 for an individual and $7,100 for a family. Those over 55 years of age may deposit an additional $1,000.
What happens if the funds are needed for a non-covered expense like elective surgery or a new car? Withdrawals for non-covered expenses will be subject to Federal Income Tax regardless of when they are taken. However, non-covered withdrawals before 65 years of age will be charged an additional 20% penalty fee.
It is important to note that covered expenses are not required to be reimbursed as they are incurred. This means that, if you can afford to wait to reimburse yourself and maintain the receipts/documentation, you can reimburse yourself at a later date for any expense incurred while your HSA was open. This allows you flexibility and control over when withdrawals are taken, which could potentially allow your money to grow even more.
*This information is not all encompassing. Please contact Clear Prosperity or your tax advisor to determine if a HSA is right for you.
