The underutilized benefits of health savings accounts

By Kevin Theissen

Healthcare can be one of the priciest yet most essential parts of life’s journey. And yet, many struggle to utilize the financial tools that may help. Take health saving accounts (HSAs), for example.

In 2019, 55% of those with HSAs that did not record a distribution also did not receive either employee or employer contributions. This suggests that the lack of distributions are due to account holders becoming disengaged from their accounts, rather than not having access to this cost-saving financial tool.

And yet, for those looking to help manage the financial impact of healthcare, a health saving account (HSA) may be just what the doctor ordered.

HSA tax benefits

A large draw for many are the tax benefits inherent to HSAs:

• Contributions through an employer are always pre-tax.
• You can invest the funds after your account balance reaches a certain level.
• Distributions for qualified health expenses aren’t taxable.

Additionally, unlike a flexible spending account (FSA), which is funded with pretax dollars but must be used by a specific deadline, HSA contributions can remain in your account to be used for future medical bills at any time. In short, this means there is no “use it or lose it” penalty.

Keep in mind that if you spend your HSA funds for non-qualified expenses before age 65, you may be required to pay ordinary income tax as well as a 20% penalty. After age 65, they function much like a traditional IRA, and you can take distributions for any expense (not just medical). In addition, you may be required to pay ordinary income taxes on HSA distributions.

HSA contribution limits for 2022

HSA contribution limits are adjusted annually for inflation. For 2022, the individual contribution limit is $3,650 or $7,300 for families. This is a $50 increase for individuals and a $100 increase for families from 2021. The contribution limit refers to contributions from both employers and employees (or family members).

How to use your HSA

The IRS or your HSA provider are great sources when getting started. For example, the IRS recently issued a reminder that at-home Covid tests, face masks and sanitizing wipes can all be purchased, or qualify for reimbursement, through an HSA.

Kevin Theissen is the owner of HWC Financial in Ludlow.