HSAs and Health Insurance
HSAs are tax-advantaged arrangements that can be used to manage health deductibles and out-of-pocket costs and also allow taxpayers to save for future health care expenses. Many employers have an HSA option available for their employees. If the employer does not offer it, check with the bank or brokerage firm about whether you can fund an HSA for yourself or your family.
Eligibility for HSAs is restricted. You must have a high-deductible health plan to qualify. The minimum allowable deductible for 2020 is $2,800 for family coverage and $1,400 for self-only coverage. And out-of-pocket costs, including copayments, cannot exceed $6,900 a year for individual coverage and $13,800 for family coverage.
Expenses for preventive care can be covered dollar for dollar by HDHPs, even if the deductible has not been met. Alternatively, preventive medical costs can be covered by a lower deductible, depending on the terms of the insurance policy. This past summer, IRS relaxed the rules for people with certain chronic illnesses. Some services and drugs for a range of chronic conditions are treated as preventive care that can be covered by HDHPs, including blood pressure monitors for hypertension, statins for heart disease, and selective serotonin reuptake inhibitors for depression.
People enrolled in Medicare cannot contribute to HSAs. Once you turn 65, you can use any remaining HSA funds on a tax-free basis to pay monthly Medicare premiums. And while you are on Medicare, you can continue to take tax-free payouts from your HSA for out-of-pocket medicals. HSAs have several major federal tax advantages that owners can enjoy.
Contributions to HSAs are deductible or are from pretax wages, up to a limit. For 2020, the annual cap on contributions to HSAs is $3,550 for self-only coverage and $7,100 for family coverage. People born before 1966 can put in $1,000 more.
Excess contribution are not deductible and are subject a 6% yearly excise tax until withdrawn.
Earnings inside an HSA build up tax-free for the account owner. HSAs do not have a use-it-or-lose-it rule, unlike health flexible spending accounts. And any withdrawals that are used to pay medical expenses are not taxed. Distributions from HSAs for other purposes are taxed and subject to a 20% penalty. The fine doesn’t apply to account owners who are age 65 or older, disabled or deceased.
There are currently three HSA proposals in Congress’s lower chamber: 1) allowing HSAs to reimburse the cost of menstrual products and over-the-counter drugs, 2) letting HDHPs cover the cost of inhalers with no deductible, and 3) permitting individuals with subscriptions for access to primary care to remain eligible to fund an HSA. These bills were approved by the House Ways & Means Committee on a bipartisan basis.