Matter & Substance
  December 13, 2022

The Overlooked Benefits of HSAs

HSAs are now a key feature of many health-insurance plans, both for employees and individual buyers. For 2023, the maximum HSA contribution is $7,750 for a family and $3,850 for an individual, plus $1,000 for participants age 55 and older, and unused HSA dollars typically can be invested and grow tax free.
HSA owners who don’t withdraw from their accounts—either because they have low health costs or can afford to pay current expenses out of pocket—get tax breaks even better than the ones for IRAs and 401(k)s. There’s no tax on HSA dollars going in, tax-free growth of account assets, and no tax on withdrawals used to pay eligible health expenses. HSA funds left in the account can compound for years.
If you have an HAS or are interested in getting one, here are some often overlooked features.

Children of parents with HSAs can qualify for their own HSA

Under current law, children such as recent graduates can fund their own HSA based on their parents’ health coverage.

For example, if you have an adult child under the age of 26 who is still on your high-deductible plan and your child is not claimed as a dependent on your tax return, they can put up to $7750 into their own HSA—even if you have already funded your own.

Spouses age 55 and older get a catch-up break

HSA owners who are 55 and older can put $1,000 extra a year into an HSA.

If one spouse carries the family coverage, the other (if 55 or older) can still get a $1,000 catch-up contribution. But this spouse must put the money into his or her own HSA, as accounts are individually owned.

HSAs are portable

As with IRAs, HSAs are owned by individuals, not employers or insurers. If the fees offered by one sponsor are too high, the owner can move it to another.

HSA payouts are often better than itemized deductions

Although a wide variety of medical expenses count as itemized deductions on Schedule A of the tax return, many filers no longer itemize deductions. People who do itemize can only deduct medical expenses exceeding 7.5% of their adjusted gross income. HSAs bypass both issues by allowing participants to make pretax contributions.

There’s an April 15 loophole

As long as an HSA is set up by year-end, the participant has until the following tax-due date in April-or the date the return is filed, if earlier—to fund it. Those who want to pay out-of-pocket expenses with HSA funds can wait to finish—or begin—funding their accounts until they know their eligible medical expenses for the prior year.

HSAs lose benefits when inherited—except by a spouse

Unlike traditional and Roth IRAs, HSAs can’t be inherited and used for medical expenses, except by a spouse. Otherwise, the assets become taxable at death.

Although this might seem like less of a benefit, it's important to remember the HSA owner’s executor can use funds in the account within a year to pay unpaid medical bills at death and claim prior expenses that were paid out of pocket—as long as there’s proof of them.