Wealth Column: Unpacking medical savings accounts – Brainerd Dispatch

Until you turn 65 and are eligible for Medicare, you’ll need some type of medical coverage. Whether this means participating in your company’s health plan, your spouse’s company’s health plan or purchasing coverage from the insurance marketplace, you’ll need to figure out which options make the most sense for you. Key to understanding health insurance is knowing what your plan costs, what it includes, and who it covers. In this column we unpack two supplemental health savings options worth considering — the Health Savings Account (HSA) and Flexible Spending Arrangement (FSA).

HSAs are key features in many health insurance plans, both in group employee plans and for individual buyers. It’s a type of medical savings account that lets you set money aside on a pretax basis to pay for eligible healthcare expenses. An HSA allows for tax-free reimbursement of eligible healthcare expenses — but, if asked, you must be able to prove them by producing receipts. Unlike with an IRA, the withdrawals from an HSA will be tax-free if used to pay for eligible expenses. And, unlike an insurance policy, HSA dollars can be used for a broad range of expenses, such as contact lens solution or a wig after chemotherapy.

To be eligible for an HSA, you must be enrolled in an HSA-qualified, high-deductible health insurance plan, which for most people means plans with deductibles of about $5,000 for a family and $2,500 for an individual. Additional exclusions include the following:

• You can’t be enrolled in Medicare (that is, you cannot contribute to an HSA if you’re enrolled in Medicare, but you can take payouts if you have an existing HSA).
• You cannot receive coverage through a spouse’s non-HSA health insurance plan or flexible-spending account.
• You cannot be claimed as a dependent on someone else’s tax return.

An HSA works very similar to your retirement plan at work: You (the employee), your employer, or both, put pretax dollars into an HSA to pay for out-of-pocket health care costs. The maximum total contribution for 2023 is $7,750 for families and $3,850 for individuals, plus $1,000 catch-up provision for participants who are 55 and older. You own the assets in the HSA for the life of the account and can access them even if you switch jobs or retire.
Tax benefits are generally better for HSAs than for 401(k)s and IRAs. For one, money going in is not taxed, account assets grow tax-free while held in the account, and withdrawals used to pay for eligible health expenses are also tax-free. (However, if withdrawals are not used for qualified expenses, and you’re under age 65, you will owe federal income tax as well as a 20% penalty.) Secondly, since at age 65, you can take withdrawals for nonmedical expenses and pay income tax on them, just like a traditional IRA payout,

HSAs can be used as a supplemental retirement account

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