If you have a high deductible health plan, chances are you also considered a Health Savings Account (HSA) to help pay for out-of-pocket healthcare costs. Open enrollment has come and gone, and you are now enrolled in an HSA. Now what? Two things you want to figure out right away: how you will contribute to your HSA and how much you will contribute.
How to make contributions
If your employer offers an HSA, then the best way to contribute money to your HSA is through payroll deductions. This method allows you to make pre-tax contributions. If your employer doesn’t offer an HSA, you will need to check with them to see if payroll deduction is an option. If it isn’t an option , then you can consider a few other methods of funding your HSA:
- Automatic withdrawal from your bank account – Most if not all, HSA providers allow you to setup automatic withdrawals from your bank account and have the money deposited directly into your HSA. The funds would be contributed post-tax; however, you don’t lose out on the tax advantage as these funds are tax-deductible on your personal income tax return.
- Write a check – you can write a check to your HSA. Again, the money would go into you HSA post-tax, but it is tax-deductible.
- IRA rollover – you can make a one-time rollover from your IRA to your HSA. There are specific rules that must be followed when doing this, so it is highly recommend that you discuss this with your accountant and/or a financial advisor.
How much to contribute
After you have figured out how you will make contributions to your HSA, determine how much you want to contribute. The IRS sets the contribution limits annually and for 2020 individuals can contribute $3,550 and $7,100 for families. When it comes to funding your HSA you will want to contribute what your are comfortable with, but to get the most out of your HSA you will want to contribute the full annual limit that you are eligible for. Since HSA eligibility is determined on a monthly basis it is recommended that you prorate your contributions based on the months that you are eligible and enrolled, unless you are confident you will stay eligible and enrolled in the HSA through the entire year. You can contribute the full annual limit right up-front; however, making a lump-sum contribution at the beginning of the year can create an issue if you end up losing eligibility mid-year as you will have to pay income tax on the excess contributions and a 10% penalty. Due to the rules with funding the full-year contribution up front, you should discuss it with an accountant ahead of time to make sure this is the best method of funding for you.
Also, keep in mind that if your employer contributes to your HSA, those contributions are included in your annual limit; make sure to factor them in so you don’t exceed that limit. The nice thing with HSAs is that you can adjust how much you contribute throughout the year, so if your financial situation changes you can adjust your contributions accordingly. And, since you don’t lose unused funds at the end of the year, you can use HSA money to pay for both current or future healthcare costs, making it a great way to help save for retirement.
Hannie Spitzack is an HSA Sales Relationship Manager at BPAS. If you would like to learn more about the BPAS Roadways HSA please call 1-866-401-5272 or email her at [email protected].