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With the start of the open enrollment season, you may find yourself having to decide whether a HSA should be part of Medicare 2023 coverage. These Premium tax accounts Allow users to save on medical expenses.
Many companies will soon hold—or have already begun—the annual enrollment period open for workers to choose their health plan for the next year, among other employer-sponsored benefits. Some of these companies will offer so-called high-deductible health plans, which are what HSA is associated with, as a coverage option.
“For the most part… [HSA eligible] “The plan is the most cost-effective way to get health insurance,” said certified financial planner Carolyn McClanahan, founder of Life Planning Partners in Jacksonville, Florida.
However, fewer companies are offering them: In 2021, an estimated 17% of companies with health benefits offered higher-deductible plans, down from 20% in 2020 and 26% in 2019, according to Research from the Kaiser Family Foundation.
“There has been a tendency for employers to offer plans with high discounts only,” said Lisa Myers, director of customer services and benefit accounts at Chancellor Willis Towers Watson. “But they actually backed up a bit…Most employees have a choice in what to sign up for.”
An HSA-qualified, high-deductible health plan for 2023 will come with an annual deduction — the amount you pay for covered medical costs before insurance begins — of at least $1,500 for an individual plan and $3,000 for families. However, these plans often have lower monthly premiums compared to the higher non-deductible coverage options.
Meanwhile, HSAs are known for their triple tax advantages: Contributions are made before tax, growth is tax-free, and withdrawals used for eligible health care expenses aren’t taxed either.
They’re similar to Flexible Spending Accounts, or FSAs, that also allow you to save pre-tax money to use for qualifying medical expenses regardless of your health coverage. But HSAs have key features that may make an HSA-qualified high deductible health plan a better option for some workers.
Myers said that healthy workers who expect to have lower medical expenses during the year are good candidates for maximizing the benefits of HSAs.
However, even if you spend what’s in HSA on current health care expenses, you can still benefit from pre-tax contributions, which reduce your taxable income, Myers said.
For 2023, the annual maximum HSA contributions are $3,850 for self-cover only and $7,750 for family coverage. Both amounts are above the FSA’s contribution limit of $2,850 per employee for 2022. (The FSA’s 2023 caps have not been announced.)
One of the main benefits of an HSA is that unlike FSAs, the money you contribute is not “use it or lose it” – that is, you can leave the money there from year to year and, if invested, let it grow over time.
“If you can afford to allow your HSA to grow, that’s the best option because the money can grow tax-free forever and be used to cover medical expenses later,” McClanahan said. “You can always withdraw this money in future years to cover past health care expenses.”
In other words, if you pay your current healthcare costs out of your pocket instead of withdrawing from HSA, you can make up for yourself down the road — just keep your receipts.
Another benefit with HSAs is that you can change the payroll withholding rate at any time during the year rather than setting this amount before the year begins, as is the case with FSAs.
Older workers—those who are at least 55 years old—can put an additional $1,000 into their Social Security account. Be aware, however, that if you are nearing the Medicare eligibility age of 65, you cannot contribute to your account once you enroll in Medicareeven if it is only Part A (hospital coverage).
However, when you reach 65, you can use the HSA money for any expenses, although the withdrawal will be taxable if it is not used for health care costs.
Myers said that some companies that offer both eligible HSA plans and FSAs provide online tools to help their employees decide which makes more sense.