Understanding Your Health Savings Account (HSA) [Breakdown]

If you qualify for a Health Savings Account (HSA), it provides a great method with some careful planning to both pay health insurance companies less and save for retirement, while reducing your tax liability. Setting aside money in an HSA allows you to save money on a pre-tax basis to pay for qualified medical expenses. Think of expenses that health insurance would typically cover. Although many people can benefit from an HSA, they are not for everyone. It is important you complete a cost analysis and consider the circumstances affecting your individual situation to determine if an HSA is the right decision for your family and you. Discussed below are some important things to consider when determining whether you should open an HSA including: how to qualify for an HSA, HSA contribution limits, and HSA cost analysis.

How to Qualify for an HSA

To qualify for an HSA, you must have a High Deductible Health Plan (HDHP). To qualify as an HDHP, your medical insurance must have a deductible of at least $1,400 for an individual and $2,800 for a family in 2020. Many of the HDHPs offered by private insurers, for example through your employer, will carry even higher deductibles. The deductible amounts listed above are minimum requirements. Any medical insurance coverage with those deductibles or higher will qualify as an HDHP, as long as they only cover preventive services before the deductible takes effect.

There is no age limit for enrolling in an HSA. You may continue in an HSA after age sixty-five through an employer sponsored plan or individual plan. However, you cannot be receiving Medicare or Social Security Benefits. Medicare does not qualify as an HDHP. Once you sign up for Medicare, you can no longer contribute to an HSA. However, you can continue to withdraw funds from your HSA to cover out-of-pocket medical expenses.

HSA Contribution Limits

If you have a High Deductible Health Plan, you can contribute up to $3,550 for individual coverage and up to $7,100 for family coverage into an HSA in 2020. If you are age 55 or older, you can contribute an additional $1,000 each year. If you have family coverage that you share with a spouse, except for the additional $1,000, you can decide how you distribute the contributions between both of your HSAs. One of the amazing benefits of an HSA is that any person can make a contribution to the HSA on behalf of an eligible individual. Also, if it is an employee’s HSA, the employer can contribute as well. Both you and your employer have until April 15 to make contributions for the previous year.

Example. Joe, age 55, signed up for the High Deductible Health Plan through his employer to cover his wife, age 52, Mary, and himself. As an incentive for choosing the lower cost health insurance plan, his employer contributed $1,500 to his HSA.

In 2020, Joe and Mary would be able to contribute up to $7,100 into their combined HSAs. Joe, because he turned 55 in 2020, would be able to contribute an additional $1,000 in his HSA. Mary could open up her own HSA, and they could split the contribution anyway they choose. To simplify things, many spouses just choose to split it 50/50 or $3,550 ($7,100/2) for each of their accounts. If Mary and Joe split it evenly, this means Joe could deposit additional $3,050 in his account ($3,550 - $1,500 contributed by employer + $1,000 additionally allowed contribution because Joe is 55 or over). Mary could deposit $3,550 into her account. However, other than the $1,500 from Joe’s employer, which will be deposited in his HSA, and the additional $1,000 he is allowed to contribute, Joe and Mary can determine the best way to divide the HSA contributions. They could deposit it all in Joe’s HSA, if they chose.

You are not required to contribute to your HSA, even if you qualify for one. However, every dollar you contribute is on a pre-tax basis, which means you will not have to pay taxes on that money.

HSA Cost Analysis

To determine if a High Deductible Health Plan (HDHP) with an HSA is best for you takes some careful cost analysis. Everyone’s situation is different. If you pay the health insurance for a child that you have with an ex-spouse, it may not be worth the trouble. However, you should always review your options. Depending on what health insurance is available for your from either your employer or the Marketplace will help you determine the best option for you.

Example. It was open enrollment for his health insurance plan, and Paul was trying to decide his best option for coverage for his family and him. His employer offered three health insurance plans as follows:

• Option 1: No deductible. $20 co-pay for doctor’s visits. $10 co-pay for prescriptions. -- $200 a week
  
  
• Option 2: $1,000 deductible. 20% co-insurance. Max out of pocket $2,000. -- $150 a week
  
  
• Option 3: $3,000 deductible. 10% co-insurance. Max out of pocket $4,000. -- $75 a week

For Paul, a cost analysis might look something like this:

Option 1: Health Insurance cost $10,400 for the year. He would still have some minimal copays out of pocket. Because they would not amount to a lot except in rare circumstances, he didn’t factor them in.

Option 2: Health Insurance cost $7,800 for the year. He could potentially have an additional $2,000 out of pocket, and he definitely would have to pay $1,000 out of pocket before the insurance started covering his medical expenses (except for preventive appointments, like annual physical).

Option 3: Health Insurance cost $3,900 for the year. Because this qualifies as a High Deductible Health Plan, Paul’s employer contributes $1,000 towards his HSA. Since his employer contributes the $1,000, the most Paul would need to pay out of pocket for health insurance under this plan would be $6,900 ($3,900 for the cost of health insurance + $3,000 deductible + $1,000 co-insurance - $1,000 HSA employer contribution).

Under this cost analysis, the HDHP is the best savings for Paul and his family. The chances they will need to pay out the full deductible and coinsurance each year is very low. However, even if they do, they still save money.

The Bottom Line

A Health Savings Account (HSA) can provide a great tax savings vehicle to help reduce the cost of your health insurance. Everyone’s situation is different, so it is important to consider all the factors and complete a cost analysis to determine which plan is best for you.

For the previous tax year, you can contribute to your HSA up until April 15. Individuals for 2020 can contribute up to $3,550 and families can contribute up to $7,100, as long as you have a qualifying High Deductible Health Plan (HDHP). If you are age 55 or over, you can contribute an additional $1,000.

Assessing the tax benefits of an HSA with a HDHP versus check purchasing a more expensive health insurance policy with better coverage can be tricky. Schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group. They will help you complete a cost analysis, so you can determine the best option for you.