HDHPs cover preventive care in full – this is a feature of all Affordable Care Act plans – otherwise, benefits are subject to the plan deductible, coinsurance and out-of-pocket maximum (no copays).
HDHPs have specific guidelines in terms of allowable deductibles and out-of-pocket costs. These are adjusted annually by the IRS. The premiums for HDHPs are not always lower than traditional copay plans, however, the major benefit of an HDHP is that it allows covered insureds to open and contribute to an IRS-qualified Health Savings Account (HSA). In 2022, you can make tax-free contributions to this account (even if you take the standard deductions and don’t itemize) of up to $3,650 for individuals or $7,300 for family coverage. If you’re 55 or older, you can contribute an extra $1,000 a year. In 2023, the contribution amounts increase to $3,850 for individuals and $7,750 for family coverage, with an extra $1,000 contribution for those age 55+.
Contributions to the HSA can only be made by eligible individuals with in-force coverage under an HDHP.
This money is yours to withdraw, tax free, at any time, to pay for non-reimbursed qualified medical expenses. As long as you had an HSA when you incurred the qualified medical expense, you can reimburse yourself after the fact – so if you incur a medical expense this year and pay for it without using funds from your HSA, you can opt to reimburse yourself for those expenses from your HSA in the future, as long as you keep your receipts.
An important note is that the HSA must be open prior to incurring the qualified medical expense.
Health insurance premiums are not a qualified medical expense, however HSA funds can be used for COBRA premiums, Medicare premiums (other than premiums for a Medicare supplemental policy, such as Medigap), long-term care premiums, or health insurance premiums paid while receiving unemployment benefits.
If you take distributions from your HSA for anything other than qualified medical expenses, you’ll pay tax on the distribution, plus a 20% penalty. However once you turn 65, you can take distributions for any purpose, paying only income tax, and no penalty.
Your money is not taxed if you’re withdrawing it to pay for qualified medical expenses, even if you are no longer covered by an HDHP at the time that you take the distribution.
You are responsible for keeping records (receipts) that show that distributions from your HSA were used to pay or reimburse qualified medical expenses which were not paid or reimbursed from another source, or taken as an itemized deduction in any year. Keep copies of your health plan Explanation of Benefits (EOB) that document your expenses for services covered by your HDHP. Keep receipts for all other items purchased or reimbursed with HSA funds, for example dental, vision and eligible over-the-counter items.