Advantages & Disadvantages of an HSA (Health Savings Account)
Health Savings Accounts have been integrated into the employee benefits world since December 2003. Even though they’ve been around for almost 20 years, there’s still some confusion around these accounts. Below, I will give you the advantages & disadvantages of this arrangement.
Advantages
1. Triple Tax Savings
Your contributions to the HSA reduce your taxable income, any investment growth within the account is tax-free, and qualified withdrawals (that is, ones used for medical expenses) are tax-free.[1] This is arguably the best advantage of an HSA, especially if you’re a high-income earner
2. Portable
An HSA account is owned by the individual, not the employer. If you leave your job for any reason, the HSA goes with you - even if the employer contributed some of the money to the account.
3. Other Expenses
Not only can the funds be used for medical expenses like doctor visits or prescriptions, but also expenses like:
Vision: eyeglasses, contacts, exams
Dental: fillings, braces, exams
Mental health: medications, psychiatric care, and potentially therapy bills
See link for qualified HSA expenses: https://www.irs.gov/publications/p502
Disadvantages
1. Must be Paired with an HDHP - High Deductible Health Plan
For a health plan to be considered “HDHP” in 2023, it must have a:
Minimum deductible of $1,500 maximum out-of-pocket expenses of 7,500 (Individual)
Minimum deductible of $3,000 and maximum out-of-pocket expenses of $15,000 (Family)
This type of plan can be difficult for individuals and families who have chronic conditions or various prescriptions, as the deductible (the amount you pay out of pocket before insurance kicks in) is typically higher than a traditional health plan. Before choosing a HDHP, make sure to understand the costs and your personal liability.
2. Penalties for Non-Medical Withdrawals
If you remove funds from your HSA before age 65 for something other than a qualified medical expense, you'll incur a 20% early withdrawal penalty.
Contribution Limits and Qualifications:
For 2023, the contribution limits (the total yearly amount you can put contribute to your HSA) are:
- Individual: $3,850
- Family: $7,750
- If you’re 55 or older, you can put an additional $1,000 away.
Overall, a high-deductible health plan paired with an HSA might be a good fit depending on your specific situation. For further questions regarding HSAs or anything employee benefit related, contact Christian@benxconsulting.com
[1] https://www.investopedia.com/articles/personal-finance/120715/why-hsas-appeal-more-highincome-earners.asp#:~:text=An%20HSA%20has%20a%20unique,expenses)%20are%20tax%2Dfree.