Health Savings Accounts (HSAs) are individual savings accounts with tax benefits designed specifically to pay the medical bills of people enrolled in High Deductible Health Plans (HDHP).
As long as HSA funds are used to pay qualifying medical bills, account holders will not pay tax on the amount withdrawn.
The funds in these accounts are similar to any normal investment account. The account holder is the full owner of all contributions, even if made by an employer and can invest the funds in various investment options offered by the financial custodian, which will typically be a variety of mutual funds or index funds.
High deductible health plans
Highly deductible health plans offer lower premiums than traditional health insurance plans, with much higher deductibles being offset (the amount the insured must pay before the insurer begins to cover some or all of the total cost of the medical treatment or physician) compared to traditional health insurance plans.
For 2021, the minimum deduction for the health plan remains the same, at $1,400 for individuals and $2,800 for joint filers. For 2022, the minimums remain the same.
For the year 2021, the maximum eligible direct expenses of the plan will increase to $7,000 for singles and $14,000 for family coverage. For 2022, the minimum out-of-pocket expenses allowed is $7,050 for singles and $14,100 for family coverage.
These limits apply to the network costs for the plan; there are no specific limits set for out-of-network coverage and costs.
The triple tax advantage of HSAs
Contributions to the HSA have tax advantages on three levels:
The contribution is a deferred tax, which means that it is deducted as an adjustment on the first page of the account holder's income tax return and is not subject to income tax until withdrawal.
Withdrawals used for eligible medical expenses are never taxable
Gains from investments in the account are never taxed, as long as it is used for qualifying medical expenses.
These are three important advantages that far outweigh the advantages of many other tax accounts.
HSA Contribution Deadline
You must contribute to your health savings account before the year's tax due date on which you pay your HSA contribution.
Here are some deadlines:
Deadline for the 2022 HSA contribution: April 15, 2023
Deadline for the 2021 HSA contribution: April 15, 2022
Deadline for 202 HSA contributions: May 17, 2021
Contribution limits for HSA 2022
On May 11, 2021, the IRS announced that it was increasing the HSA contribution limits until 2022.
There is no income limit to qualify for an HSA, although you must apply to your employer and have a high-deductible health insurance plan to qualify.
Contributions are also 100% deductible at all income levels.
Contribution limits for 2021 HSA
The IRS announced on May 20, 2020, that it would increase the HSA contribution limits again.
There is no income limit to qualify for an HSA, although you must apply to your employer and have a high-deductible health insurance plan to qualify.
Conclusion
For those already using an HDHP and expecting to have a significant amount of qualifying medical expenses, the benefits of avoiding income tax for these expenses far outweigh the effort of setting up an HSA and cover the annual administrative fees that depositories may debit.
Combined with the fact that there are no income or phase-out limits to qualify for HSAs, this can be a viable tax benefit strategy for anyone with HDHP.
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