First Federal Bank Blog

Health Savings Account 101

Written by First Federal Bank | Sep 8, 2021 2:00:00 PM

Medical expenses can extend way beyond the bill you receive from your doctor’s office. If you have a high-deductible health plan, you may be privy to a health savings account (HSA). With an HSA, you can deposit tax-free funds earmarked for paying off a range of medical costs including copayments and deductibles. Here is a closer look at the basics of an HSA:

Signing up for an HSA

Typically, an HSA is offered through an employer-sponsored high-deductible health plan that you as an employee can select. If your employer doesn’t offer this option, you can open a separate HSA. If you are self-employed, you can also opt for an HSA as long as you are currently covered by an HDHP. For 2021, the IRS defines an HDHP as any health care plan with a deductible of at least $1,400 for an individual or $2,800 for a family. Total out-of-pocket expenses — including deductibles, copayments, and coinsurance — are limited to a total of $7,000 for an individual or $14,000 for a family. But these limits don’t apply to out-of-network services.

Contributing to an HSA

Depending on your HSA, you may be able to set up deductions from your paycheck that are automatically deposited into your HSA. You can then use checks or a debit card to draw funds from your HSA to pay for qualifying bills. How much money you contribute to your HSA is up to you, depending on your projected medical expenses, needs, and budget. There are government-set limits, though, to keep in mind. 

The annual contribution limits for HSA contributions (in 2021) are $3,600 (individual) and $7,200 (family). For individuals age 55 and older, additional catch-up contributions are allowed. For 2021, this amount is $1,000. All contributions to an HSA must stop once the individual becomes eligible for Medicare.

Tax benefits of an HSA

The best part of an HSA is its three-fold tax-free components. The money you save, grow, and spend does not suffer the wrath of taxation, as long as you follow HSA parameters.

HSA contributions are either pre-tax (if through an employer) or tax-deductible (if you opened your own), you don’t pay taxes on the account’s growth, and if you make withdrawals for eligible expenses, you don’t pay tax on those withdrawals either. You can even use your HSA balance as investment collateral in stocks and mutual funds.

Using HSA funds

Not all medical expenses qualify for HSA funds. In 2020, HSA funds were approved to pay for prescriptions, lab fees, medically necessary items such as compression socks and weight loss programs, vision exams, and some dental and orthodontics expenses. Be sure to familiarize yourself with what the IRS deems acceptable before you access your HSA account. If you do use HSA funds for non-qualified expenses before the age of 65, expect a tax penalty of 20 percent.

An HSA can be a valuable tool in your financial portfolio, helping you to save and pay for a range of medical expenses.