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Health Savings Accounts

The Health Savings Account (HSA) permits eligible individuals who are not enrolled in Medicare to save for "qualified" medical health expenses on a tax-free basis. Note that over-the-counter (OTC) drugs unless prescribed are not a qualifying expense. These accounts may be offered through employers. However, any insurance company or bank can offer HSAs to eligible individuals as well.

These plans are only available to individuals with high-deductible health plans, i.e., plans with a deductible in 2020 of at least $1,350 ($1,350 same as 2019) for individuals and $2,800 ($2,700 for 2019) for families. For 2020, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $6,900 for an individual or $13,800 for a family. (This limit doesn't apply to out-of-network services.). The annual “catch-up” contribution amount for individuals age 55 or older will remain $1,000.

Contributions are tax-deductible, and distributions, when used for a qualified medical expense, are tax-free. If expenses are not qualified, then the distribution may be treated as taxable income, and a penalty may also apply.

However, when used as intended, HSAs can grow tax-free, and unused balances can roll over from year to year. These accounts are also portable and may be used across different jobs. These are all potential advantages of using the Health Savings Account when compared with the Flexible Spending Account.

If you're covered under your employer's plan and your spouse is self-employed or doesn't have coverage, should your spouse consider having his or her own individual medical coverage? The answer is probably no: Pick him or her up on your plan. It is likely the most affordable and, generally, the most comprehensive way to get coverage.

There are additional details and restrictions that must be considered. Check with your tax professional or account sponsor regarding your eligibility to use the HSA. For more information on this topic, see the section Health Savings Accounts.

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