Reason #1 – Lower Premiums
One of the first benefits you will notice when comparing an HDHP to other medical plans is that the premiums are much lower. HDHP’s premiums are lower since the deductibles are higher than normal PPO or HMO plans. Insurance companies do not have to cover as many medical expenses, so they give you a lower premium. The same is true for auto collision and comprehensive coverages. If you raise the deductibles, you will pay less in premiums. If you are healthy, you could save money on premiums.
Reason #2 – Pre-Tax Contributions
Most companies will allow you to set up contributions to your health savings account once you sign up. The maximum you can contribute to an HSA depends on whether you have an employee-only HDHP or a family HDHP. Employee-only plans can contribute up to $3,650 annually, with an additional $1,000 if you are over 55. Family plans allow contributions up to $7,300 annually, with an additional $1,000 if you are over 55. The best part is that your employer can contribute to your HSA pre-tax. An HSA mimics a 401(k) or pre-tax employer retirement plan. Wages go in without you paying taxes.
Reason #3 – Tax-Free Growth
You might be asking, “If an HSA is like a regular bank account, why would I get one in the first place.” The reason is that you can invest your contributions. Only 9% of people who own an HSA invest their funds. Investing money is one of the main reasons for getting an HSA. The investments grow tax-free. In essence, an HSA resembles an IRA or 401(k).
Reason #4 – Tax-Free Withdrawals
When you withdraw money from your health savings account, the money is tax-free when used on qualified medical expenses. An HSA has a wide array of qualified medical expenses. There are not many medical expenses that an HSA does not cover. Essentially, an HSA is a triple net tax-advantaged account. If you follow the process above, you will never pay taxes on the contributions to a health savings account.
Reason #5 – Income Tax Deduction
The last benefit will feel like the best. You can deduct the contributions to the HSA from your income for federal income taxes. There are no income limits for this deduction. You or your CPA will need to fill out Form 8889. The contribution amount goes up almost every year. For 2023, the contribution limits are Employee only – $3,850 and Family – $7,750. If you are over age 55, you can still contribute an additional $1,000.
There are many benefits to owning a health savings account. If you are healthy, young, or do not spend much time at the doctor, you should consider an HDHP with an HSA. It is another investment vehicle that will directly help pay for expenses in retirement, much like an IRA. If you do not have an HDHP, you cannot contribute to an HSA. That is one major limitation. However, once you have opened and funded an HSA, you can invest and use it for life. Please get in touch with us if you have any questions about your employer benefits and if an HSA is right for you.