Health Care
Health care is likely to be one of your largest and most unpredictable retirement expenses. It’s difficult to determine what conditions you may have or how much care you may need and when. Unfortunately, today’s workers must understand that the cost of health care is expected to continue rising significantly in future years.
Health care costs continue to rise, and a fall in retirement can wipe out your plans. Making sure you manage health risks is important. Throughout life, more health-related risks mean more financial risks. In retirement, it’s important to understand these risks and how to manage them.
Your health can be impacted by many risks, including medical, long-term care, disability, frailty, early death or loss of partner, and longevity. Most people face similar health concerns, but the frequency and severity of these concerns tend to increase with age. In addition, as we age, we may be unable to handle the additional financial strain associated with health risks. Managing these risks may be accomplished through a combination of planning, savings and insurance coverage. It’s important to understand some of the risks that might apply to your situation.
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Health Savings Account (HSA)
A health savings account (HSA) is a tax-advantaged medical savings account a family or individual can use to pay for qualified medical expenses. HSAs are paired with a high-deductible health plan (HDHP) and have annual contribution limits. Each year, the IRS adjusts the annual contribution limit, annual deductible amounts, and other limits for HSAs.
- A Health Savings Account (HSA) is a tax-advantaged account to help people save for medical expenses that are not reimbursed by high-deductible health plans.
- No tax is levied on contributions to an HSA, on the HSA’s earnings, or on distributions used to pay for qualified medical expenses.
- An HSA, owned by an employee, can be funded by the employee and the employer.
- Contributions are vested and unused account balances at year-end can be carried forward.
2022 HSA Contribution Limits
The maximum contribution for an HSA in 2022 is $3,650 for an individual ($3,600 for 2021) and $7,300 for a family ($7,200 in 2021). The annual limits on contributions apply to the total of the amounts contributed by both the employer and the employee. Individuals 55 years or older by the end of the tax year can make catch-up contributions of an additional $1,000 to their HSAs.
An HSA can also be opened at certain financial institutions. Contributions can only be made in cash while employer-sponsored plans can be funded by the employee and their employer. Any other person, such as a family member, can also contribute to the HSA of an eligible individual. Self-employed or unemployed individuals may also contribute to an HSA, provided they meet the eligibility requirements.
How an Health Savings Account (HSA) Works
As mentioned above, people with HDHPs can open HSAs. Individuals with HDHPs may qualify for HSAs and the two are usually paired together. To qualify for an HSA, the taxpayer must meet eligibility standards set out by the Internal Revenue Service (IRS). An eligible individual is someone who:
- Has a qualified HDHP
- Has no other health coverage
- Is not enrolled in Medicare
- Is not claimed as a dependent on someone else’s tax return
The maximum contribution for an HSA in 2022 is $3,650 for an individual ($3,600 for 2021) and $7,300 for a family ($7,200 in 2021).The annual limits on contributions apply to the total of the amounts contributed by both the employer and the employee. Individuals 55 years or older by the end of the tax year can make catch-up contributions of an additional $1,000 to their HSAs.
An HSA can also be opened at certain financial institutions. Contributions can only be made in cash while employer-sponsored plans can be funded by the employee and their employer. Any other person, such as a family member, can also contribute to the HSA of an eligible individual. Self-employed or unemployed individuals may also contribute to an HSA, provided they meet the eligibility requirements.
Tax Savings
An HSA can help you save on health care and also offers some tax advantages.
- You pay no taxes on the money you put into your HSA.
- You pay no taxes on the money you take out of your HSA to pay for eligible health care expenses. You will pay a penalty on HSA funds you use to pay for non-eligible expenses.
- You earn tax-free interest on the money in your HSA account. You may also have options to invest the money in your account.
- You don’t lose the money in your account at the end of the year. Your HSA balance rolls over and is always yours to spend, save and invest.
- At age 65, you can use your HSA funds for any purpose without a penalty. The money you take out to pay for eligible health care expenses continues to be tax-free.
Conclusion
Understanding HSA contribution rules and deductible limits is essential to making the most of the benefit, allowing both you and your employees to maximize contributions and get tax benefits and save on out-of-pocket expenses. An investment in your employees’ health benefits is the best way to show them you care about their health and wellbeing, as well as their financial future, while also helping you recruit and retain top talent.
As a person ages, medical expenses tend to increase, particularly when reaching retirement age and beyond. Starting an HSA at an early age, if you qualify, and allowing it to accumulate over a long period of time, can contribute greatly to securing your financial future.
