Health Savings Account (HSA) is a type of savings account. The money that you transfer to this account can be used to pay for your medical expenses. But what health insurance plans qualify for HSA?
Keep reading to know more.
What Health Insurance Plans Qualify for HSA?
Many health insurance plans on private and private exchanges are compatible with HSA. If you’re shopping for a health plan, you can determine if it’s HSA compatible by looking at the description. It’s often designated as bronze or silver.
Generally, a health insurance plan that qualifies for HSA has a yearly deductible of at least $1,250 for individual coverage or $2,500 for family coverage.
However, if you qualify for reduced cost-sharing, you’re not eligible to contribute to an HSA.
Thus, if you have not bought a health insurance plan yet but would want to qualify for an HSA contribution, you can purchase a health plan sans cost-sharing reductions.
What are the Requirements to Open an HSA?
One of the main requirements for opening such an account is to have a high-deductible health plan. The plan must also meet IRS guidelines for the yearly deductible and out-of-pocket maximum.
In addition to that, you must not have an HDHP plan, like a spouse’s plan.
You should also not enroll in Medicare. If you don’t qualify to receive TRICARE health benefits, you can open this type of savings account.
See Also: Health Insurance vs Savings Account
How Does an HSA Work?
As long as you meet the requirements to open an HSA, you can open this type of account at certain financial institutions. All contributions to this account must only be made in cash.
However, if your health insurance plan is sponsored by your employer, you and your employer can fund it.
A family member can also contribute to your HSA. Even if you are unemployed or self-employed, you can contribute to an HSA, as long as you meet the eligibility requirements of this account.
What are the Pros and Cons of an HSA?
There are various advantages and drawbacks to opening an HSA.
It’s tax-free. If the contribution is deducted from your payroll, it is considered a taxable income. A direct contribution to this account is 100% tax-deductible from the employee’s income. Any earning that you receive here is tax-free. However, if you reach the limit, the excess contribution will incur a 6% tax and it’s not tax-deductible.
However, distributions from this account are tax-free. But the funds must be qualified for medical expenses.
Furthermore, you can invest the money in your HSA to buy stocks and other securities. Over time, you can get higher returns.
You can only open an HSA if you have a high-deductible plan. It means that you need to be affluent to afford the high deductibles and can take advantage of tax benefits.
If you fund your own HSA, you need to be financially capable to contribute to this account. But it can be burdensome if you don’t have enough cash to contribute to HSA.
Furthermore, there are specific rules you need to follow when it comes to withdrawals. You also need to report the distributions. Keeping records can be a burden for you. It can be difficult to maintain.
See Also: Can Health Insurance Plans Discriminate?
How to Withdraw from an HSA?
You can withdraw the money from an HSA. However, if you want the withdrawal to be tax-free, the amount you have withdrawn must be used to pay for qualified medical expenses. These expenses are evaluated by the IRS.
It’s important to note that deductibles, vision care, deductibles, dental services, psychiatric treatments, prescription drugs, and other qualified healthcare expenses that are not covered by your health insurance policy are treated as qualified medical expenses.
However, your monthly premiums don’t count as a qualified healthcare expense. But if the premiums are for other health care coverage for a plan when getting healthcare COBRA, they may be treated as qualified medical expenses.
You don’t need to use the money for your HSA during the tax year. If you don’t use the fund, the contributions can be rolled over to the next year.
If you change jobs, you can keep your HSA.
It can also be transferred to your surviving spouse tax-free when you die.
Is HSA the Same as a Flexible Savings Account?
It is often compared with FSA. You can use both accounts for your medical expenses. However, FSA is an employer-sponsored plan.
It means that if you are not employed, you can’t sign up for FSA. HSA, on the other hand, is open to self-employed and unemployed.
Unlike HSA, FSA unused funds can’t be rolled over. Thus any fund that hasn’t been used is forfeited after the year ends.
FSA contribution is fixed while HSA is not.
Is HSA Right for You?
You can treat HSA as your personal savings account. However, the money will be used to pay for your medical expenses. You control the money in it.
As mentioned, the money you put into this account is tax-free. But to open this account, you need to buy a high-deductible plan.
So, is it right for you?
It may or may not be right for you.
To determine whether HSA is ideal for your situation, you need to weigh your options. Since it requires a high deductible health insurance plan, you must think about your budget. You also need to evaluate your health care in the next year.
If you are healthy and you can spare cash for your future healthcare expenses, then this account may be an ideal choice.
Furthermore, if you’re nearing retirement, this account may make sense to offset the costs of your healthcare treatments after retirement.
However, if you need expensive medical care next year, you might find it difficult to maintain or pay for high deductibles. In other words, HSA may not be the right option for you.
What health insurance plans qualify for HSA? Many health insurance plans qualify for a health savings account. But you need to meet its requirements first.
If you’re wondering why health insurance is expensive, here’s the answer.