By Alexandre Ptaszynski

A Health Savings Account (HSA), is an account that can be established to pay for certain current or future healthcare expenses, provided you are currently enrolled in a High Deductible Health Plan (HDHP). An HDHP that combines traditional health insurance coverage with an HSA provides a tax free way of saving for healthcare expenses. Compared to a traditional HMO, an HDHP/HSA combination will have lower monthly premiums, but a higher yearly deductible. Essentially, this means that HDHP members will pay less in monthly premiums, but will pay more when they need to access healthcare.

As mentioned previously, being enrolled in an HDHP is a prerequisite to opening an HSA. Depending on your age and health, being eligible to open an HSA could be a major incentive for switching from a traditional HMO to an HDHP. Here are some of the advantages of using an HSA to save for health related items:

• HSAs can provide significant tax savings to the account owner. Some of which are:
  • HSA contributions are made on a pre-tax basis.
  • Money contributed to an HSA can be invested and the earnings are tax free.
  • HSA distributions used to pay for qualified medical expenses are non-taxable.
• Once the account owner reaches the age of 65, they can use the HSA funds for non-medical expenses and not pay any withdrawal penalties (although income tax may be assessed on earnings).
• Unlike a flexible spending account, unused funds roll forward year after year. There is no minimum spending requirement or penalty for letting your savings accumulate.
• Since HSA contributions made through payroll are not subject to FICA, many employers offer yearly contribution matches or incentives to account owners who open HSAs. During your next open enrollment period, check with your employer to see if they offer an HSA contribution match.

Single coverage HSA owners are allowed to contribute a maximum of $3,550 in 2020 and $3,600 in 2021. Family coverage HSA owners are allowed to contribute a maximum of $7,100 in 2020 and $7,200 in 2021. Additionally, individuals over the age of 55 may make extra “catch-up” contributions of up to $1,000 per year.

This example should display the savings that an HSA provides. Let’s say you are a single and relatively healthy taxpayer in a 24% tax bracket who spends an average of $600 per year on healthcare expenses.

	HDHP with HSA	Traditional HMO
Yearly Premiums	$1,200	$2,700
Amount towards Annual Deductible/Co Pays	$   600	$   150
Employee Contributions to H.S.A. used to pay for deductible/co pays	$1,650	$   –
Total cost of premiums & H.S.A. contribution/ Premium & Co Pays for HMO	$2,850	$2,850
Benefits
Tax Savings on Premiums	$   380	$   855
Tax Savings on HSA Contribution	$   522	$   –
Employer Contribution to HSA	$   300	$   –
Total Benefits	$1,202	$   855
Total cost net of tax	$1,648	$1,995
HSA Balance
Individual Contribution	$1,650	$   –
Employer Contribution	$   300	$   –
Less Health Expenditures	$ (600)	$   –
Ending HSA Balance	$1,350	$   –

As you can see, the HDHP with HSA premiums not only costs less, but if you contribute roughly half the maximum amount to your HSA you will still have $1,350 of tax free money in your account at the end of the year. That money can be invested through your HSA provider with tax free growth or used on medical expenses the following year. Remember, there are no spending minimums and your savings will continue to roll over year after year with no penalties.

If you have any questions regarding how to set up or fund an HSA, as well as any questions or concerns regarding HDHPs and HSAs in general, please contact your tax professional.