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Five Hidden Features of Health Savings Accounts

Paying cash for current medical expenses while letting assets inside the HSA grow tax-free can be a boon for many employees.

November might be best known for Thanksgiving and Veterans Day. But it’s also famous for something referred to as open enrollment season.

That’s the period when many employees can update or change their medical, dental or vision plans, and enroll (or re-enroll) in the healthcare and/or dependent care flexible spending accounts. And typically, those changes take effect on Jan. 1.

Some employees will also get the chance to decide whether to participate in a health savings account (HSA) and, if so, how much to contribute. The limit on HSA contributions for 2022 will be $3,650 for an individual ($4,650 for age 55 or older) and $7,300 for family coverage, according to the IRS.

You’re eligible for health savings account if you’re covered under a qualified “high deductible health plan.” That’s a health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $7,050 for self-only coverage or $14,100 for family coverage. (Read: IRS Announces 2022 Limits for HSAs and High-Deductible Health Plans.)

At the moment, 82% of employers currently offer an HSA, and another 2% are planning or considering adding one in the next year or two according to a Willis Towers Watson survey.

To be sure, many employees might know that HSAs provide employees with a triple-tax advantage. Employees can contribute to them on a pretax basis; savings grow free of taxes over time, and withdrawals can be made tax-free to cover qualified medical expenses.

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However, there are many hidden features in HSAs according to Lisa Myers, director of client services at Willis Towers Watson. What are those hidden features? In an email, she noted the following:

Not one and done. Employees may change their HSA contribution election during the year. This differs from other pre-tax benefits such as medical coverage and health care flexible spending accounts that require the employee to experience an IRS-qualifying event, such as getting married or divorced, in order to make a change during the plan year.

HSA “catch-up” contributions for employees age 55 or older are a great way to boost balances for savers and pre-tax funds for spenders. For instance, employees may contribute an extra $1,000 in 2022 as long as they turn 55 before the end of 2022. Also, many couples contribute the family maximum to one spouse’s HSA. But only the account holder can make catch-up contributions. So, if the spouse is also over age 55, it might make sense for the spouse to set up his or her own HSA and contribute up to $1,000.

Adult children covered by an employee’s medical plan can have their own HSA. As long as a covered child is no longer the employee’s tax dependent, he or she can open an HSA, and anyone can contribute to it. This is a great way to provide a safety net for children and encourage them to go to the doctor since they’ll have a cushion to fall back on.

You can use HSA funds for large expenses, like college. A strategy of paying cash for current medical expenses while letting assets inside the HSA grow tax-free can be a boon for those who can do so. These employees can later spend those accumulated HSA funds on, say, college tuition or a trip around the world, as long as they have the receipts from earlier health care expenses to back it up.

Money in an HSA can be used by the employee, spouse and dependents, even if they are not covered by the employee’s medical plan.

Learn more:  The Ultimate Primer on Health Savings Accounts.