The trend toward employers offering high-deductible health plans (HDHP) — and no other option — seems here to stay, like it or not. HDHP coverage is growing at a 15% pace, annually. In 2005, such plans covered 1 million people. Now, they cover more than 15 million, including 10% of those in Connecticut who are under 65 and have private insurance.
Some consumers fear a HDHP because they worry about being on the hook for that deductible, should they need significant medical care. The silver lining, though, is the ability to pair an HDHP with a tax-advantaged Health Savings Account (HSA).
Such an account allows the holder to pay for medical care on a tax-free basis. To be eligible to open an HSA, you must be covered solely by a high deductible health plan and not enrolled in Medicare, and you cannot be claimed as a dependent on another person’s tax return. Also, HSAs are strictly for one person. Even if you are married, you cannot have a joint HSA with your spouse.
So what qualifies as a “high deductible” health plan?
The IRS definition of an HDHP is one that has a higher annual deductible than “typical” health plans, plus a maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. For 2015, the minimum deductible that qualifies is $1,300 for an individual and $2,600 for family coverage. The maximum out-of-pocket limit is $6,450 for individuals and $12,900 for family coverage.
How much can you contribute?
If you meet that criteria (and none of the IRS special exceptions apply), then you can contribute to an HSA account. Individuals can contribute up to $3,350 a year, and those with family coverage can contribute up to $6,650. If you are 55 or older, you can contribute an additional $1,000.
Just like contributions to a 401k/403b and traditional IRA, these are made tax-free, as is any interest your contributions earn. You can then use those savings to meet your deductible and other qualified medical expenses.
What are the benefits?
Unlike a “use it or lose it” Flexible Savings Account, unused funds in a HSA roll over year after year, and they are portable, following you when you switch jobs. In fact, you can even use the account to pay for health insurance premiums while you are between jobs, plus qualified long-term care premiums and Medicare premiums.
You do have to be careful to use the funds for qualified medical expenses only. If you don’t, the IRS will tax your withdrawal and impose a hefty 20% penalty on top, which is worse than the 10% penalty that applies to early 401k withdrawals.
After age 65, your HSA essentially converts to a retirement account, and you can withdraw the money for any reason and pay ordinary income taxes, but no penalty, though you can still avoid paying tax by using it to pay for qualified medical expenses.
How do I set up an HSA?
Call or stop by one of our branches and we will help you open or transfer an existing HSA. Our HSA accounts are FREE and you can fund them easily with in-person deposits, automatic transfers from other accounts, or direct deposit from your employer. You can access your funds by check or debit card.
HSAs are an excellent vehicle for many to save on health care. Plus, employers will often provide some kind of matching contribution, which is also tax-free to the account owner. Remember, all of our accounts are FDIC insured.
Contact me today at 860-482-9707 with all your HSA questions.
Assistant Vice President