It’s interesting that in 2022 out of the 176.5 million privately insured Americans only 71.7 million of them had an HSA. So today, I want to explore Health Savings Accounts and now that open enrollment for 2024 is right around the corner I want to share all the most helpful information you need to know so that you can make the best choice for your health coverage. Full disclosure, I’m a big fan of HSAs and I have been since 2017 when my wife and I enrolled in ours, but there are important tips that I will go over in this podcast so you don’t make mistakes that could cost you.

What is an HSA?

Let’s start with the basics and answer what an HSA exactly is. HSA stands for Health Savings Account and this “is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur.” That’s from the IRS. But I think this needs to be explained just a little bit further.

Basically this is a type of savings account that you can save money in on a pre-tax basis to pay for qualified medical expenses. There is a huge advantage to health savings accounts, because the money that goes into your HSA is untaxed and can be used to pay for deductibles, copayments, coinsurance and other qualified expenses.

How Do You Get an HSA?

To have an HSA you have to have a high deductible health plan, an HDHP. And for for the calendar year 2024, a “high deductible health plan” is defined [under § 223(c)(2)(A)] as a health plan with an annual deductible that is not less than $1,600 for self-only coverage or $3,200 for family coverage, and for which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $8,050 for self-only coverage or $16,100 for family coverage.

For those of us in the workforce check with your employer. Fortunately we have an HSA offered with some of the health insurance plans available at my workplace. But even if your workplace doesn’t have an HSA available with the health coverage you have you can still shop for an HSA with banks or credit unions and even Fidelity has an HSA you can sign up for. Fidelity’s HSA is highly rated and probably the one I’d go for if I didn’t have one through my employer.

Other requirements include:

• Not be covered by other health insurance (see Publication 969 for exceptions)
• Not be enrolled in Medicare (the individual can be HSA-eligible for the months before being covered by Medicare)
• Not be eligible to be claimed as a dependent on someone else’s tax return
• Oh yeah, and with the HDHP you have to be covered by that HDHP on the first day of the month. So, even right now you still have some time to get an HSA open in 2023 and make your contributions. You essentially have top open your HSA by December 1 and you have until the tax filing deadline (NOT the extension). The IRS calls this the Last-month rule and they say, “You are treated as having the same HDHP coverage for the entire year as you had on the first day of the last month if you didn’t otherwise have coverage.”
  • Just make sure you stay eligible for your HSA through the what’s called the Testing Period. The IRS is very clear, “If contributions were made to your HSA based on you being an eligible individual for the entire year under the last-month rule, you must remain an eligible individual during the testing period. For the last-month rule, the testing period begins with the last month of your tax year and ends on the last day of the 12th month following that month (for example, December 1, 2021, through December 31, 2022).”

What are the income limits for an HSA?

Good news is that there are no income limits, but you do need to be enrolled in a high deductible health plan as we discussed.

How much can you contribute to your HSA in 2024?

For calendar year 2024, the annual limitation on deductions under § 223(b)(2)(A) for an individual with self-only coverage under a high deductible health plan is $4,150. For calendar year 2024, the annual limitation on deductions under § 223(b)(2)(B) for an individual with family coverage under a high deductible health plan is $8,300.

An individual with coverage under a qualifying high-deductible health plan (deductible not less than $1,600) can contribute up to $4,150 — up $300 from 2023 — for the year. The maximum out-of-pocket is capped at $8,050.

An individual with family coverage under a qualifying high-deductible health plan (deductible not less than $3,200) can contribute up to $8,300 — up $550 from 2023 — for the year. The maximum out-of-pocket is capped at $16,100.

Catch-up contributions: Individuals who have an HSA and are over age 55 can also contribute an extra $1,000 annually, in what is commonly called a “catch-up” contribution.

Now keep in mind that all or a certain portion of this money can be invested so that it can grow over time. AND also that money invested can go down, because the market is not predictable. Yes, you can invest that money, but I would pause and look over your savings accounts other investment accounts to make sure you have the maximum out-of-pocket expenses until insurance covers everything. I feel like the actual spending and using the money in your HSA deserves it’s own podcast so be on the look out for that, but you definitely want to be able to have at least the maximum out-of-pocket saved up between your own personal savings, investments and your HSA.

Tips and strategies you can use for with your HSA:

• You don’t have to use an HSA to pay for a medical expense right away. Save the medical expense receipts, let the HSA grow and if needed you can reimburse yourself for those medical expenses anytime in the future for a non-emergency expense or maybe a vacation. Of course this means you’ll have to figure out a system that will help you maintain a good record of your medical expenses.

• As I mentioned before you can invest your HSA money in index funds that may be available and let the money grow tax-free. But one thing I try to remind myself is to invest in index funds that are low cost.

• After the age of 65 your HSA funds can be withdrawn for anything similar to a Traditional IRA or 401(k). You would just have to pay your income tax on the withdrawals. However, if you try to use the funds in an HSA for non-qualified expenses before age 65, you will pay income tax AND a 20% penalty. Ouch!

• If you’re employed by a company, many times the company will provide funds yearly to put in your HSA. For example, a company can offer HSA dollars if you get a physical or watch a health video. That’s free money for you and your family to fund your HSA without having to use your own personal funds. This has become a very great benefit for us. We basically met the majority of our deductible through company contributed money into our HSA, because of the rewards.

HSAs are a great way to fund future medical expenses like long term care insurance premiums and future health insurance premiums. You have an amazing opportunity to act today and not worry later in life.