Health Savings Account + High Deductible Health Plan

Who Qualifies for a Health Savings Account?

Not everyone qualifies for these accounts– certain criteria must be met. For example, if you have one of those “Cadillac health plans” villainized during the Affordable Care Act (ACA) debate and pay a lower deductible or no deductible at all, you are not eligible for an HSA.

Or, if you buy an HDHP from the marketplace, be sure to check whether it is HSA eligible.  The insurance plan must specifically state it allows access to an HSA (usually referenced in the plan’s name on the marketplace).  Don’t buy any HDHP thinking it will automatically qualify for HSA eligibility.

HSA rules require the account holder to have an HDHP either through their employer or their own policy to make contributions.  If an individual contributed funds in the past when they were eligible but no longer qualify, they may still use the funds to cover HSA eligible expenses.

Beyond just having an HSA, there are additional requirements to meet.  As stated above, not any HDHP will do.  For 2020, the requirements for establishing or having access to a health savings account are:

  1. Insured (that’s you) must be covered by an HDHP
  2. HDHP minimum deductible for an individual is $1,400 and $2,800 for a family (up from $1,350 and $2,700 in 2019, respectively)
  3. HDHP coverage can be a traditional medical plan so long as the plan doesn’t cover the first dollar of medical expenses (except preventive care)
  4. Cannot have coverage by other comprehensive medical plan, including dual enrollment in HSA and Medicare (HSA may be maintained after receiving coverage by Medicare but contributions must cease)

What are the Annual Health Savings Account Limits in 2020?

Each year, the IRS sets annual contribution limits for HSAs which determine how much you are eligible to contribute to your account.  These limits depend on whether you have HDHP insurance coverage as an individual or as a family.

The good news is the HSA limits in 2020 increased from 2019. In 2019, the individual-only HSA max contribution limit was $3,500, while in 2020, the annual HSA limit increased to $3,550.

Likewise, for families the 2019 health savings account contribution limit was $7,000, and in 2020, the contribution limit increased to $7,100.

When making these contributions, they can be done as a lump sum or multiple times throughout the year.  Further, if you are 55 or older, you may contribute an additional $1,000 per year as a catch-up contribution.

With regards to the treatment of HSA employer contributions, unlike 401(k) plan employer contributions, these contributions count toward the annual contribution limits.  If you a wage and salary employee and receive a Form W-2, you will find your employer contributions in Box 12 with a Code W.


hsa vs fsa decision

When comparing the HSA vs FSA, the former brings the added component of being an investment vehicle for building wealth.  The latter is only useful if paying for FSA eligible expenses in the contribution year.

Otherwise, you lose the unused funds contributed to the FSA account.  This feature earned this account the “use it or lose it” description.

Both accounts can be used to cover qualified healthcare expenses, however, consumers using the health savings account can have their balances build over time, accumulating resources for future medical needs.  Funds contributed to HSAs are owned by the individual, similar to an Individual Retirement Account (IRA).  After all, if you contributed funds to the account, shouldn’t you be allowed to keep them?

Further, because the money set aside in these HSA plans automatically roll over year after year, the money in your HSA can be invested and earn compounded gains tax-free. Check your HSA plan to be sure you have access to low-cost investment options which track the broader market. If so, investing through an HSA is one of the best investments for young adults, hands down.

As a note, not all states extend the same tax-advantaged status for these accounts and you should be aware of this before pursuing the HDHP and HSA insurance combination.  California and New Jersey are two notable examples of states which do not provide the tax-advantaged treatment to HSAs.

Why is a Health Savings Account Important?

A health savings account offers triple tax savings and can be extremely beneficial to individuals enrolled in HDHPs.  The funds kept in these accounts can defray the costs of HSA eligible expenses which fall outside the health insurance coverage.

These funds are contributed either as a payroll deduction directly from your paycheck or through a deposit made into the account.  If the contribution goes into your HSA by a payroll deduction, it is not subject to FICA taxes, short for the Federal Insurance Contributions Act. This is the federal income payroll tax which goes to fund Social Security and Medicare.

Depending on your income level, this gives you an extra 7.65% toward your HSA (6.2% for Social Security and 1.45% for Medicare).

Depending on your health savings account plan, there are available options for you to invest your unused funds.  My employer partners with PayFlex, an HSA administrator associated with Aetna.  Prior to that, my funds were managed in a JPMorgan Chase HSA account.  However, other options exist.  One such option, like Lively, is highlighted below.

PayFlex offers me savings and investment options for regular direct deposit contributions I make each pay check.  Currently, I split my contributions 80% toward a low-cost S&P 500 index mutual fund available through the plan and 20% towards a high-interest savings instrument in the event I need immediate access to the funds.

For my account, the HSA administrator requires a minimum balance of $1,000 to be eligible for investing.  Most accounts have a minimum balance requirement to access the available investing options.

The key to remember when considering investing your HSA funds is to find an HSA plan which provides investing options where the first dollar invested goes into low-cost, diversified investments in reputable funds.  Be sure to avoid companies which require minimum balances for investing or charge large fees relative to your balance.

Related: Don’t Miss These 10 Last-Minute Tax Savings Opportunities

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