Employers often offer high-deductible health plans (HDHP) to employees because they come with low monthly premiums — a money-saver for both the employer and the employee. However, HDHPs only cover preventive care until the deductible is met, which can be a serious hit to your wallet if you’re not prepared.1
To help employees manage those pre-deductible costs, many employers pair their HDHP option with a health savings account, or HSA. With an HSA, employees can set aside money on a before-tax basis to pay for out-of-pocket healthcare expenses. Employers can make contributions to these accounts, giving employees extra help with those costs. And many HSAs offer the opportunity to earn interest or investment income.
What You Need to Know
Not every high-deductible plan qualifies for an HSA.
HSA contributions are limited.
Medicare plans don’t qualify for an HSA.
HSAs are triple-tax advantaged — the money you set aside is contributed on a before-tax basis, any interest you earn on your account is tax-free, and you don’t pay taxes on withdrawals as long as they’re used to pay for healthcare expenses.
When Is an HDHP HSA-Qualified?
As the name implies, your insurance plan must meet certain deductible requirements to qualify for an HSA. However, it’s not the only qualification. Your HDHP:
- must comply with all IRS deductible and out-of-pocket limit requirements.
- can’t cover any expenses other than preventive care (such as annual checkups, regular screenings and immunizations) before you meet your deductible (there are certain exceptions).
- can’t be paired with an HRA, which is another type of employer-funded and -owned account that reimburses employees for qualified medical expenses.2
What Is a High-Deductible Plan?
An HDHP has not just a high deductible, but a higher deductible than traditional insurance health plans.
According to the IRS, for 2021, your health plan is classified as an HDHP if it has a minimum deductible of $1,400 for an individual or $2,800 for a family, though those amounts can be higher.3
These limits are subject to change annually, so it’s important to check with your employer or human resources associate for current amounts.4
Did You Know?
Both you and your employer can contribute to an HSA.
What Is a Health Savings Account?
A health savings account is an account where you can save money to pay for immediate qualified medical expenses such as copays, deductibles and prescription costs — or to pay for future healthcare costs, even after retirement. Both you and your employer are permitted to contribute funds to your HSA.
What Are Other HSA Requirements?
While you must be enrolled in an HDHP to participate in an HSA, you can’t be covered by any other health plan (such as your spouse’s plan or Medicare), except qualified ancillary plans (or another HDHP).5 Per the IRS, those ancillary plans include coverage for:
- A specific disease or illness (for example, critical illness coverage)
- A hospitalization policy that pays a fixed amount for a specific time period (aka a “hospital indemnity plan”)
- Any liabilities sustained under workers’ compensation laws, tort liabilities or related to ownership or use of property
- Dental, vision and/or long-term care
In addition, you can’t be claimed as someone else’s dependent on their tax returns.7
A Word of Advice
Deductible and out-of-pocket limits can change annually, so you’ll need to check those with your employer.
How do HSAs Work?
Your employer may set up an HSA on your behalf, or you may be required to establish one for yourself with an HSA trustee. Both you and your employer can make contributions to your HSA, which then can be withdrawn as needed to pay for qualified medical expenses.
You can claim a tax deduction for your contributions to your HSA even if you don’t itemize your deductions. Any employer contributions to your HSA may be excluded from your gross income. If your HSA earns interest, it also will be tax-free. Your HSA belongs to you, not your employer, so if you change employers, retire or otherwise are no longer working, you can take your HSA with you.8 Be sure to name a beneficiary for the account. You can pass it on to your spouse after you die, or it can become part of your estate.
What happens if your spouse is also covered by an HDHP?
If your spouse also is covered by an HDHP, he or she must open a separate HSA. You can’t share or open a joint HSA.9
How Do They Work Together?
An HSA can help pay for qualified medical expenses such as copays, deductibles, coinsurance, and dental and vision costs. Once you meet your deductible, your HDHP starts to cover your medical expenses as outlined in your plan. You can continue to use your HSA funds to cover copays and coinsurance. If you prefer, you can let funds build up in your account for future use.
If your healthcare is generally limited to annual checkups, screenings and immunizations, having access to an HSA can make your insurance coverage affordable. However, if you have children or a chronic illness, need pricey medications or otherwise routinely need medical care beyond preventive services, this may not be an affordable option and you might consider different coverage.
What Are Yearly Limits for HSA Deposits and HDHP Out-of-Pocket Costs?
Every year, the IRS sets limits on the amount that can be contributed to your HSA, as well as how much you have to pay for out-of-pocket costs under your HDHP. These limits may change each year, so it’s important to check on them before purchasing or renewing a policy to make sure they’re still affordable for you.
|$3,550 – individual$7,100 – family
|$3,600 – individual$7,200 – family
|HDHP Out-of-Pocket Expenses
|$6,900 – individual$13,800 – family
|$7,000 – individual$14,000 – family
If you’re age 55 or older, you can contribute an additional $1,000 per year “catch up” contribution. And remember, if your employer contributes to your HSA, that reduces the amount you can contribute for the year.
What Do You Do with Unused HSA Funds?
Unlike a health care flexible spending account (FSA), if you don’t use all of your HSA funds during the year, they’ll roll over to the following year. Also, because you own the account, you can take it with you if you change employers, retire or otherwise no longer need the HSA for medical costs. If you don’t need the funds for medical costs, you can withdraw them to use elsewhere. However, you’ll have to pay taxes to do that. If you’re younger than 65, you’ll pay a 20% excise tax on withdrawals as well as applicable income taxes (if you’re 65 or older, you’re exempt from the excise tax).
Once you’ve qualified for Medicare, you can’t add to the HSA anymore, but you can still use what’s already in the account.
Before signing up for any medical coverage, talk with your employer, human resources associate or insurance broker to find out if your plan is an HSA-qualified HDHP. You should evaluate the costs of your monthly premiums and deductible amount, along with any HSA savings, to see if they’ll be affordable for you in the long term. If not, you may need to seek out a lower-deductible health plan with higher monthly premiums.