How a Healthcare Savings Plan Can Prepare You for Future Medical Costs

Key Takeaways
  • Out-of-pocket healthcare costs are the great unknown in retirement.
  • An HSA is a healthcare savings account that permits you to set aside money for current and future medical expenses.
  • An HSA requires enrollment in a qualified healthcare plan.
  • HSAs offer a triple tax benefit allowing funds to grow at market rates without taxation.

Medical costs are growing faster than inflation, and statistics bare a bleak picture of how medical debt can impact your quality of life. According to Lending Tree, 37% of consumers currently have outstanding healthcare bills. In 2019, The American Journal of Public Health reported that 66.5% of bankruptcies resulted from unmanageable medical debts.

Out-of-pocket healthcare expenses continue to rise faster than inflation, even among consumers with insurance. To address these concerns, Congress established Healthcare Savings Accounts (HSAs) as an alternative way to pay for qualified medical costs.

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What is a Healthcare Savings Account (HSA)?

An HSA operates similarly to the more familiar FSA (Flexible Spending Account) provided by employers. You set aside money with pre-tax dollars and can withdraw funds tax-free for qualified medical expenses.

The primary difference between the two is FSAs typically expire at the end of each year, making it a useful budgeting tool but not effective for long-term planning. HSAs permit you to accumulate balances, allowing you to save (and invest) funds needed in the future. To encourage the long-term savings feature, Congress authorized market investments with tax-free growth, giving you a triple tax benefit.

HSA Terms You Need to Know

To qualify for an HSA, you must enroll in an HSA-qualified health insurance plan. Plans require high deductibles of at least $1,400 for individuals and $2,800 for a family. The maximum out-of-pocket costs cannot exceed $7,000 on individual plans and $14,000 on family plans. In addition to these limits, it must meet coverage requirements, excluding some high-deductible plans from qualifying.

Where Can You Find a Qualified Policy

You can purchase a policy through your employer, a private company, or the government-sponsored insurance exchange.

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Contribution Limits

Individual contributions are capped at $3,600 annually, with the maximum for couples or families set at $7,000. Participants 55 and older can add $1,000 to the account each year until reaching 65. You may make annual contributions until the tax date the following year. Contributions are not allowed for participants over 65. However, the balance can continue to grow. As long as you use the funds for qualified medical expenses, it is tax-free.

How an HSA Pays for Medical Expenses

One of the greatest fears with high deductible plans is higher than expected out-of-pocket costs. However, in many cases, the way insurance policies work, you can enroll in high deductible plans and lower expenditures without sacrificing care.

Medical expenses costs can include:

  • Insurance premiums
  • Co-pays
  • Co-insurance
  • Deductibles
  • Expenses not covered by insurance

In general, the lower the deducible and greater the coverage, the higher the premium. High deductible plans can cost hundreds less each month, reducing premium costs. When you invest in an HSA, you will have money saved for ongoing or future medical bills.

Co-pays are the amount you pay for routine visits in a doctor’s office or urgent care center. Co-pays remain consistent for both low and high deductible policies and range anywhere from 0 to $50 per visit.

Co-insurance is a proportion of the cost you must pay out of pocket for medical tests. Not all policies include co-insurance.

Deductibles are out-of-pocket costs you incur before insurance coverage begins. Co-pays cover doctor visits, prescription medications, and most testing. Deductibles most often apply to surgeries, hospitalizations, and major procedures.

If you are in relatively good health without any planned procedures in the next calendar year, you might save money by enrolling in a high deductible plan without impacting the quality of care you receive.

  • What is an HSA?

    An HAS, short for Health Savings Account, is a special tax-advantaged account that allows you to save for current and future medical costs.  All funds deposited into an HSA account and withdrawn for qualifying medical expenses are free from federal income tax.

  • How do I get an HSA?

    To qualify for an HSA, you must enroll in a qualified healthcare plan. Once enrolled, you can contribute up to the annual contribution limit and take advantage of the tax benefits.

  • Should I put the maximum amount in an HSA if I don’t have high medical expenses?

    Your HSA balance will not expire at the end of the year. You can let funds grow in market investments until you need it to cover eligible medical costs.