Individuals and families that want to save money on their health insurance without sacrificing their healthcare coverage might want to consider a health savings account (HSA). These options are offered by some employers in conjunction with certain types of health insurance plans to offset the costs of higher deductibles while paying less per month on premiums.

What is a Health Savings Account (HSA)?

A Health Savings Account (HSA) is a savings account for health expenses that earns interest and allows you to deposit and make withdrawals without paying taxes on the amount. These savings accounts may also be used in conjunction with an HSA-compatible, high-deductible health insurance plan (HDHP) to pay for qualifying medical expenses. Typically, the HSA monthly premium is lower than the monthly premium for a lower-deductible health insurance plan, so choosing an HSA plan may help you save money.

How does an HSA work? 

Contributions to an HSA may be made pre-tax, up to certain annual limits set by the IRS, as detailed below. In addition, funds in the HSA may be invested at your discretion, while unused funds remain in the account and accrue interest year-to-year, tax-free.

In 2020, the average annual premium for an individual in an HSA-qualified HDHP was $1019. The average annual premium for a family that same year was $4,742. These averages are significantly less than the premiums paid for insurance coverage that was not part of an HDHP.

To gain a better understanding of Health Savings Accounts and how Obamacare affects them, check out the following video.

Benefits and Drawbacks of an HSA

There are numerous benefits of choosing an HSA for your healthcare expenses, including:

• HSA funds can be used for a wide range of expenses, including medical, dental, vision, and mental health services 
• All contributions to your HSA are made with pre-tax dollars
• Withdrawals from your HSA are not subject to income tax as long as they are used for eligible medical expenses 
• Contributions to your HSA can come from you, your employer, or a family member as long as contributions remain within the limits established by the IRS 
• You can reimburse yourself for healthcare expenses for years after they occurred as long as you have proper documentation for the expense
• Money left in your HSA at the end of the year can be rolled over to the following year

There can also be some drawbacks to an HSA, which means they are not the best choice for everyone. Some of the drawbacks include:

• Requires strict record-keeping to document each expense reimbursed by HSA funds
• Despite the money available in the HSA to cover medical expenses, your insurance plan will likely have a very large deductible you will need to pay out-of-pocket before your insurance coverage kicks in 
• If you withdraw from your HSA for non-qualifying expenses before the age of 65, you will pay a penalty on the amount withdrawn
• May be fees associated with maintaining the HSA

ACA and HSA Contributions and Obamacare Subsidies

The ACA includes subsidies to eligible Americans to help make their healthcare more affordable. However, for those that do not qualify for subsidies, there is something known as the subsidy cliff. The subsidy cliff refers to the fact that if you make a dollar more than 400% of the federal poverty level, your Obamacare subsidies disappear completely. Contributing to your HSA also might help you avoid the Obamacare “subsidy cliff” that people have unfortunately faced in the past. 

When the Biden administration signed the American Rescue Plan Act into law in 2021, it allowed individuals with incomes above 400% of the federal poverty level to qualify for subsidies if premium amounts from a benchmark plan exceed 8.5% of the applicant’s household income. While this allowed more Americans to qualify for subsidies under the ARPA, the increases are only scheduled to go through the end of 2022 at this time. 

If you have an HSA, one way to avoid the subsidy cliff is by adding more to that account. Since contributions are pre-tax up to a certain limit, you can essentially decrease your reported income for Obamacare subsidy purposes, and avoid going above your projected income and lose either some, or all of your subsidy.

2021 IRS Limits			2022 IRS Limits
	Single Plan	Family Plan		Single Plan	Family Plan
Maximum Contribution Limit	$3,600	$7,200	Maximum Contribution Limit	$3,650	$7,300
Minimum Deductible (for HDHP)	$1,400	$2,800	Minimum Deductible (for HDHP)	$1,400	$2,800
Maximum Out-of-Pocket	$7,000	$14,000	Maximum Out-of-Pocket	$7,050	$14,100
Maximum Catch-up Contribution Limit	$1,000	$1,000	Maximum Catch-up Contribution Limit	$1,000	$1,000

Be aware that not all high-deductible plans are eligible for use in conjunction with an HSA, so do your research carefully and select the Health Savings Account plan that’s best suited to your particular needs. Compare available individual and family health insurance plans with eHealth to better understand your options.

This article is for general information, so do not rely on this article as legal, tax, or accounting advice. You should consult your own legal, tax, or accounting advisor for advice on your particular situation. For additional information, visit eHealth’s HSA help center.
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