Finding affordable health insurance can be difficult. In 2020, the average cost for individual health insurance was close to $500, with family insurance costing almost $1,200.
The costs have only gone up since then, and are likely to continue to see increases throughout 2023. While there are less expensive insurance plans available, they usually come with a catch.
One way to save on your health insurance is by purchasing a high deductible plan.
With insurance, a deductible refers to how much you must pay out of pocket before your insurance coverage begins. By raising your deductible, insurance providers can offer a lower monthly rate.
In 2022, a high deductible plan was classified as at least $1,400 for individuals or $2,800 for families.
High deductible insurance may initially seem undesirable because of the out-of-pocket costs, but you can often offset the expenses by enrolling in a Health Savings Account (HSA).
Opening an HSA
The main requirement for opening an HSA is being actively enrolled in a high deductible insurance plan, but there are other eligibility requirements.
You must not be covered by either Medicare or Medicaid and you cannot be claimed as a dependent on another individual’s tax return.
If you are applying as a family, each eligible member is able to open an HSA. As of writing, joint accounts are not available.
If you lose your high deductible plan your HSA remains open, but you are unable to add new funds into it.
Putting Money into your HSA
There are a few methods to invest in your HSA. If your employer offers a high deductible insurance plan, an HSA may also be available.
Many employers use annual HSA contributions as a company benefit. Other workplaces might take a small amount from your paycheck and automatically apply it to your HSA.
There is a maximum amount you can place into your HSA each year. As of writing, the limit is $3,650 for individuals, or $7,300 for families.
Unlike with similar plans, such as a flexible spending account (FSA), the balance from your HSA rolls over each year.
Any contributions made to your HSA are tax-free. If the contributions come from your employer, the withdrawn amount does not count towards your annual income.
If you make any contributions out-of-pocket, you are allowed to deduct the amount you place into your account. Any money you withdraw from your HSA is also tax free.
Your HSA account is also eligible for investments in stocks, mutual funds or other investment sources. If you are interested in using your HSA balance as an investment, you may prefer speaking with an HSA custodian.
If you have an active HSA when you turn 65 and become eligible for Medicare, you are no longer able to contribute into your HSA. Your remaining money is still available whenever you must pay a deductible or other out-of-pocket medical expense.
In addition, if you use HSA funds on a non-eligible medical expense, you must pay an income tax. There is also a 20 percent penalty if you are under the age of 65.
Eligibility Changes
A common mistake with HSAs is eligibility lapses.
Each year, the government sets a new limit on what counts as a high deductible insurance plan. Depending on these changes, you may no longer be eligible.
This leads into another mistake: not using existing funds. Even if you are no longer eligible for an HSA, the funds always remain available.
Instead of paying a deductible, you can use the remaining funds from your HSA.
If you set aside an amount of your paycheck to go into an HSA plan, make sure to cancel the deduction if your eligibility changes. If your HSA comes from an employer, this should happen automatically, along with a notification regarding the eligibility status of your HSA.
The maximum amount you can place into your HSA account may also change each year.
If you put too much money into your HSA, you can withdraw the funds to remain below the maximum. If you do not remove the funds by April 15th of the tax year the funds were applied, you can be charged a 6 percent fine.
When to Use an HSA
Another common HSA mistake is incorrectly using the funds. Your HSA funds are meant to be used in place of a deductible, but only for eligible medical procedures.
Optional medical services, such as elective surgeries or cosmetic services are not typically eligible services.
If you use your HSA account outside of qualified medical expenses, you can be charged a penalty based on the amount you withdrew.
When you use your account on a qualified expense, it is important to get a copy of the receipt. This way, if the expense is ever challenged, you have proof the money was used on a proper expense and can avoid paying an unnecessary penalty.
Paying for Family
The rules regarding HSA family plans are tricky. As previously mentioned, your family may be able to open an account under your HSA.
While you are not allowed to share accounts, there are exceptions that allow you to spend your HSA funds on another individual.
Usually, if you are paying the medical expenses for a spouse or a qualified dependent, you are allowed to use your HSA funds.
A qualified dependent is any individual who lives with you and you pay at least 50 percent of his or her financial needs.
HSA and FSA Compatibility
HSAs and FSAs are often confused because of the similar name and purpose. As of writing, most HSA account holders are not able to open an FSA.
However, if your FSA is classified as limited purpose or you only use the FSA for dental and vision expenses, you may be allowed to keep both accounts. This limitation also applies to any other individuals on your plan.
Spending HSA Funds
Many health accounts do not offer carryover options from year to year. An HSA is like a savings account, allowing you to keep any unspent funds.
Even if you are no longer able to add money into your HSA, you may benefit from keeping the money in your account, as your HSA can be inherited by your family members.
