Ancillary insurance includes several types of supplementary health coverage that ensure employees have access to all the healthcare services they need to stay healthy. This may include vision coverage, dental coverage, life insurance, and more.
Health savings accounts (HSAs) are a common ancillary benefit that can help employees pay for their medical expenses. HSAs offer financial flexibility, security, and peace of mind, making them an important consideration for businesses that want to create a comprehensive benefits package for their employees.
Here’s what you need to know about “what is a health savings account” and more. For more information and to request a free quote, contact KSA Insurance today.
What is a Health Savings Account?
An HSA is a tax-exempt trust or custodial account that is designed to help pay for qualified medical expenses. Unlike health reimbursement arrangements (HRAs) and health flexible spending accounts (FSAs), HSAs have to be paired with an HSA-qualified, high-deductible health plan (HDHP).
Employees and employers can both make contributions to HSAs, and in most cases, individual contributions to HSAs are tax-deductible. Contributions made by employers on the behalf of an employee are excluded from the employee’s gross income. Interest on HSA contributions is tax-free as are funds distributed from an HSA for qualified medical expenses.
It’s important to keep in mind, though, that while HSAs are typically tax-exempt at the federal level, they are not always tax-exempt at the state level.
Who Can Have an HSA?
There are some restrictions as to who may be eligible for a health savings account.
Any adult can have an HSA if they:
- Have health coverage under an HSA-qualified HDHP.
- Do not have any other health coverage (certain types of insurance, such as dental insurance, are allowed).
- Are not able to be claimed as a dependent on someone else’s tax return.
- Are not enrolled in Medicare.
While many people open HSAs through their employer-provided health plans, self-employed individuals are also eligible to establish HSAs.
How Much Can You Contribute to an HSA?
Both employers and employees can make contributions to HSAs; however, HSAs are subject to maximum annual contribution limits. When you make a contribution, you can deduct it when filing your federal tax return.
You can make contributions to your HSA each year that you are eligible. The maximum amount you can contribute for 2023 is:
- $3,850 for single coverage
- $7,750 for family coverage
If you are 55 or older, you can also make additional contributions of up to $1,000 annually.
HSA contributions must stop if you enroll in Medicare. Though, you will still be able to use funds from your HSA to pay for medical expenses tax-free.
What Can You Use an HSA For?
You can use funds from your HSA to pay for any qualified medical expense permitted under federal tax law, which includes most medical services, dental care, and vision care.
Generally, you can’t use an HSA to pay for health insurance premiums. However, there are a few exceptions, including:
- COBRA premiums
- Health plan premiums while receiving unemployment benefits
- Qualified long-term care insurance premiums
- Premiums for any deductible health insurance plan other than a Medicare supplemental policy for individuals 65 or older
You can use your HSA to pay for medical expenses for yourself, your spouse, or your dependent children — even if they aren’t covered by your HDHP.
If you use funds to pay for any other than qualified medical expenses, then those amounts are taxable as income and subject to an additional 20% penalty.
Benefits of HSAs
Health savings accounts offer a variety of benefits to account holders, including:
- Security: HSAs help protect account holders against unexpected medical costs.
- Flexibility: You can use your HSA to pay for medical expenses that may not be covered by your health plan, pay for your dependents’ medical expenses, or save for future medical expenses.
- Portability: HSAs are portable, allowing you to take your HSA with you if you move, change jobs, change your health plan, or become unemployed.
- Tax Savings: HSAs provide tax savings in the form of tax-free contributions, tax-free earnings, and tax-free withdrawals for qualified medical expenses.
- Savings: HSA holders can grow their savings through investment earnings.
Health savings accounts make it easier for account holders to prepare for future medical expenses and build their savings.
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Health savings accounts offer unmatched flexibility, tax savings opportunities, and security. Employers that want to build a competitive benefits package should strongly consider offering HSAs as an ancillary benefit to their employees.
At KSA Insurance, we work with employers in South Carolina and across the southeastern United States to help them choose health plans and HSAs that ensure their employees have access to high-quality, affordable healthcare.
Contact us today to get a quote and learn more about ancillary benefits for employers.