You may want to get to know about a health savings account a little better.
HSAs are known for their triple tax advantage — contributions are made pre-tax, growth is tax-free and withdrawals used for qualified health-care expenses are also are untaxed. Yet there are some aspects of these accounts that are less well-known but could come in handy.
“A lot of people don’t really understand all of the different benefits so they’re not taking advantage of them,” said Stephen Durso, associate director of client services at Willis Towers Watson.
For example, HSAs can be used by employees who have a high-deductible health plan.
For this year and next year, that’s one with a deductible of at least $1,400 for individuals or $2,800 for families. If you have single coverage, you can contribute up to $3,650 to your HSA in 2022; family coverage comes with a maximum contribution of $7,300 next year.
Here are some of the hidden benefits.
Not one and done
If you contribute to your HSA through payroll withholdings, you can change that rate of deferral at any point during the year. (And any unused funds automatically roll over to the next year with no use-it-or-lose-it mandate.)
“Employees are more commonly familiar with flexible spending accounts, where they are locked into their contribution election,” Durso said.
“You can make changes to your HSA contributions anytime,” he said. “This makes it more flexible.”
Like catch-up contributions for retirement accounts, this is for account holders who are at least age 55.
The extra amount you can put in is $1,000. However, relatively few employees take advantage of this provision, according to Willis Towers Watson.
Adult children can be covered until age 26 under their parents’ insurance, even if they’re married or not living with the parents.
“This gives HSA eligibility to the child,” Durso said. “They can open up their own HSA and contribute to it, as long as they are not a tax dependent of the employee.”
For instance, he said, if it’s a family health plan, that adult child could open and contribute up to the HSA maximum of $7,300 (for 2022) for family coverage.
Because you can leave your HSA funds in your account as long as you want, one strategy for long-term savings is to pay cash for current medical expenses instead of using your HSA.
Then, later, when you face a large expense — i.e., college tuition, travel, down payment on a house — you can withdraw the amount you paid out of pocket earlier for qualified medical expenses.
“Just keep your receipts, and you can reimburse yourself at any point in the future,” Durso said. “And that withdrawal would be completely tax-free because it paid for eligible medical expenses.”
Also, be aware that personal protective equipment used to prevent Covid — masks, hand sanitizer and the like — is now considered an eligible expense.
Who can use the HSA money?
The money in your account can be used for qualified health-care costs for yourself, of course, but also for any tax dependent.
“It doesn’t have to be someone who’s on your high-deductible health plan,” Durso said. “For example, your spouse may have coverage through their own employer, but you can still use the funds for their expenses.”