When it comes to health insurance plans, deductibles and premiums tend to have an inverse relationship -- the higher one is, the lower the other tends to be. And many workers choose to get on high-deductible health plans to save money on premium costs. In fact, 40% of employees are enrolled in this type of plan nationwide, according to Bank of America's 2019 Workplace Benefits Report. And while employers aren't obliged to offer a health savings account, or HSA, in conjunction with a high-deductible health plan, 90% of companies with these plans do just that.
If you're on a high-deductible health insurance plan and have the opportunity to participate in an HSA, it pays to capitalize on it. Here are a few reasons why.
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1. You'll save money on taxes
HSAs are triple tax-advantaged. The money you contribute goes in on a tax-free basis so that the IRS can't tax you on that portion of your earnings. Then, the money in that account that you don't need immediately can be invested for added growth, and any gains that result are tax-free as well. Of course, the longer you leave that money invested, the more you'll benefit in this regard. Finally, HSA withdrawals can be taken tax-free as long as they're used for qualified medical expenses. Talk about a triple win.
2. You'll get lots of flexibility with your money
When you put money into a flexible spending account, or FSA, you're generally required to use up your balance by the end of your plan year or else risk forfeiting the difference. HSA funds, however, don't expire. You can fund an HSA in your 30s and carry that money all the way into retirement. And that's important because healthcare is the one expense that tends to climb for retirees, and having a dedicated source of cash to cover it could save you a world of financial stress when you're older.
3. You might get free cash for healthcare purposes
Just as it's common practice for companies to match 401(k) contributions among participating employees, so, too, do many employers put money into HSAs on their workers' behalf. Often, these contributions aren't made in the form of a match but, rather, as a pre-designated sum. Signing up for an HSA could therefore result in extra funds to pay for healthcare that don't actually come out of your own pocket.
Go fund that HSA
To qualify for an HSA in 2020, you'll need a health insurance plan with a deductible of $1,400 or more if you have self-only coverage. If you have family coverage, that deductible will need to be at least $2,800.
Assuming you qualify, you'll be allowed to contribute up to $3,550 in 2020 as an individual or up to $7,100 as a family. And if you're 55 or older, you can make an additional $1,000 catch-up contribution on top of whichever limit you qualify for. Any amount you put into your HSA is money the IRS can't tax you on, so it pays to aim to max out if you can. That said, if your employer does put money into that account for you, it counts toward your annual contribution limit, so keep that in mind as you make your funding election.
