Health Savings Account – HSA Rules and Limits UPDATED for 2021

By | October 18, 2021
Health Savings Account

Is a Health Savings Account a good option for you?

And if you have one, are you maximizing the benefits of it?

In this article, I’m going to cover the positives and negatives of HSA’s. And then I will reveal the biggest mistake that 95% of HSA owners make. And finally, I’ll share my own personal strategy in how to supercharge one of the best features of an HSA. This was from my second article on this website.

And I’ve noticed it’s been starting to get some interest now that everyone is looking into their healthcare options for the upcoming year. So, I thought I would edit and update some of the information that is specific for 2021, and add some information from another article I did on how the CARES Act enhanced not only HSA benefits but also HRA’s and FSA’s.

Now that the channel has evolved to focus mostly on investing, you’ll see how an HSA is not just a way to way to manage your healthcare, but how it can be another tool for growing your wealth…if you use it the right way.

And I’m going to show you how to do that…so stay tuned! If you’re wondering what an HSA is, let’s first talk about what it isn’t. Many people confuse an HSA with a Flexible Spending Account, or FSA, which is an account run by your employer where you can put aside pre-taxed money for healthcare expenses with the understanding that you have to use that money for that year—

It’s a use it or loses it account and there can be a lot of headaches with this inaccurately planning how much expenses you will incur in an upcoming year. A Health Savings Account is very different in that you actually own the account and can take the money with you if you leave your job.

Also, it’s not use it or lose it account—your money can roll over from year to year without any penalty. And another exciting difference between an FSA and an HSA is that you can invest the money of your HSA, which is not an option for an FSA; we’ll be talking much more about this in a little bit.

Now if you’re considering signing up for an HSA, you also have to sign up for a qualifying high deductible health care plan to be eligible. Update time! For 2021, the minimum deductible for a high-deductible health care plan is $1,400 for an individual and $2,800 for a family.

Another criterion to be eligible is that the out-of-pocket maximum for an HSA-qualified health plan cannot be more than $7,000 for individual coverage or $14,000 for family coverage. When signing up for a plan, an insurer will generally let you know if it’s HSA-eligible, if they don’t, you will want to contact them to check into that.

So why would you want to sign up for a high deductible plan?

Well, there are some good reasons. If you are relatively healthy and don’t typically have a lot of medical expenses, then a high deductible plan might be a great option for you because your premiums are often significantly less than lower deductible plans.

Also, many employers will put some money into your account for you—so that’s basically free money given to you, just like if your employer puts a match into a 401k for you. Now on the other hand, if you don’t like high deductibles, you plan to receive a higher amount of medical services, or don’t have money set aside for unexpected medical expenses.

Then an HSA may not be for you. But I would challenge you to look at the difference in the cost of your premiums over the year and you may be surprised at how much the low deductible plans actually cost.

When I was looking at my options last year, my company’s low deductible plan would cost me about $180 every 2 weeks out of my paycheck or $4,680 over the course of the year whereas the High deductible plan cost me about $50 every 2 weeks or $1300 for the year.

So, over the course of the year, I would pay almost $3,400 more out of my paycheck for the low deductible plan. However, by signing up for the HSA, my company also put $500 into my account so I really came out almost $4000 better and, since I had low medical needs, I came out way ahead on an HSA.

Okay, now, the exciting part about HSAs is the ability to invest the money in your account—and all of the tax benefits that go with this. You may have heard people talk about the triple tax benefits of HSAs and you start to realize that they are not just for your health, but also can help create wealth—2 of the major things this channel is about!

So, let’s go over the 3 tax benefits: One, the contributions you make to the account are tax-free. Two, any withdrawals you make for qualified health expenses are not taxed. And number three, any money invested in the account grows tax-free.

This last part is super exciting because of the implications—and notable because about 95% of HSA accounts have no investments, which means that there is no opportunity for the money to significantly grow. You can receive interest in the account, but we know how low-interest rates are now and how little that will produce.

So, to clarify, 95% of people are only using their HSA to pay for health expenses completely tax-free—and that’s not a bad thing. And if it’s difficult to put much more money into your account because of other life expenses, then that’s what you have to do. In this case, I would recommend that you at least contribute enough money into your account that covers the deductible on your plan so that you’re not left with the stress of having to pay a lot of money for unexpected medical expenses.

Now…if you have the ability to put a little extra money into your account, I want you to start thinking of how your HSA can not only become a place to hold tax-free money for medical expenses but as a place to grow money tax-free that can help you big-time in retirement. And I would say that if you’re someone that is actively planning for retirement, an HSA should be something you absolutely consider.

I would even argue that it could be a wiser decision to fully fund your HSA before an IRA…or even a 401k above any money you have to put into to get your full employer match…you always want to get that full match of free money when you can.

Does this sound crazy??

Well, let me tell you why it’s not. Because let’s say you put money in your HSA and never need to take out any withdrawals for healthcare expenses.

Well, when you turn 65, then your HSA becomes effectively like an IRA where you can take the money out penalty-free for any reasons when it will then be taxed at your current income tax rate—UNLESS—it’s for Healthcare expenses—which then you can withdraw tax-free!

And over the years, because your money was invested, it actually has grown to be more than what you originally put into the account. Okay–now I’ll share with you my ultimate strategy that is good for anyone that does not absolutely need to use their HSA to pay for expenses at that time you incur them and just requires a few organizational skills.

And that is, for co-pays or small medical costs, I just pay out of my pocket and don’t make a withdrawal from my HSA, again only because I don’t absolutely need to get reimbursed at the time. But I keep the receipts in a folder labeled unreimbursed medical expenses—and keep in mind that they do have to be for dates after I established my HSA.

And this is where it’s great—so the money I don’t take out for the healthcare expense, I let it grow by investing it in my HSA—with annualized returns of about 7% compounded year over year. And then once I retire or if I find myself out of work, I can get withdrawals from my HSA using my old unreimbursed healthcare receipts—and those receipts can be from 20 years ago!

This is another great benefit of an HSA that I find many people that have them don’t realize–you don’t have to pull money out of your HSA to get reimbursed for medical expenses in the same year that you incurred the expense. And in this way, I can maximize all 3 of the major tax benefits of HSAs, which again, 95% of people with HSAs don’t do!

So now, you’re thinking maybe an HSA is for you, right?

Well let me first share with you the HSA contribution limits that are set annually by the IRS: for 2021, you can now contribute up to $3,600 for individual coverage and $7,200 for a family. Keep in mind, if your employer puts in money for you, then that counts against the limit—so for example, if your employer puts $500 into your account, then you can only put in $3,100 to reach the max contribution for self-only coverage.

If you’re age 55 or older, you can save an extra $1,000 each year to play catch-up. With these annual limits, an HSA could never replace an IRA or a 401k, but could definitely play a role in your retirement planning.

Now a lot of this sounds really good, but there are some things that you have to keep in mind when making this decision—the negatives. One big thing to keep in mind is if you would ever need to pull money out of an HSA before you are 65 years old and that money is not used for healthcare expenses, you would face a 20% penalty plus any taxes that may be due.

The other major thing to remember, just like any investment, there are no guarantees that you will have positive returns and could even lose money—however, history shows us that investments over time greatly outpace interest earned in savings accounts and inflation.

So if you have a weak stomach when the market has a downturn, which as we know happens, then the investment part of an HSA may not be for you, although, keep in mind that you will likely have a lot of options within your HSA brokerage account that are less risky.

So, you may have heard that due to the unexpected events of this year, the federal government passed a law to help mitigate the effects to the people most negatively impacted by it. That law was called the CARES Act and was passed in March.

Most people know it as the law that provided stimulus checks to individuals and provided enhanced unemployment benefits. But the law did some other things as well, and today, we’re going to talk about how it affected people that have Health Savings Accounts or HSAs, Flexible Spending Accounts or FSAs, and Health Reimbursement Arrangements or Accounts also called HRAs. Let’s start on the one change that only affects HSAs first.

In regards to the CARES Act, one of the big changes is that telehealth visits are fully covered where you now don’t have to meet your deductible to have the visit covered. Now keep in mind this change is in place only temporarily through the end of 2021.

So for routine doctor visits, if you have an HSA, you can do a telehealth visit at no cost to you which can be a big money saver, because, in the past, you most likely would’ve had to pay for the entire visit on your own assuming you hadn’t met the higher deductible these plans require you to have.

So, the telehealth visit is a fantastic option for savings in costs and time for those who are already enjoying the lower premiums that a High Deductible Plan offers. And this coverage is for any non-emergency visit you need, so it doesn’t have to be related to the pandemic.

Now the next 2 big improvements apply to all of the 3 accounts we mentioned before: HSAs, HRAs, and FSAs, and the great thing about these improvements are that they are permanent changes for each of these plans.

The first of these 2 permanent improvements is that OTC medications are now covered for tax savings reimbursement without a prescription from your doctor. So, if you need to get something for a headache or cough, or allergies, you can get these reimbursed from your accounts without having to go to the doctor to get a prescription.

The second permanent improvement is that, for the first time ever, female hygiene products are now eligible for reimbursement on a pretax basis through any of these accounts. So, I think you can see which half of our audience is really going to like this benefit.

Ladies, I’m sure you’re thinking, “it’s about time!” Now as a guy, I can’t…and won’t…claim to know a lot about female hygiene products and how much they cost over the course of a year, but I can say that anytime you buy something with money that wasn’t taxed from your paycheck, you’ve already saved at least whatever your effective income tax rate is, and let’s say that’s 14.6% which is what the average person paid in some of the most recent data I‘ve seen…so that’s pretty good!

All three of these changes can lead to big savings depending on your healthcare needs. I hope you have found this information helpful, and if you did, once again, please visit the website. As always, I hope that we can all learn from each other on how to take little, easy steps in making big improvements in our lives. Thank you again for watching and until next time, have a great day!

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