Is the High-Deductible, Health Savings Account Medical Plan
Right for You and Your Family?
For many of you reading, your airline benefits open enrollment period is quickly approaching. You will have many choices during this annual open enrollment and this article addresses one of the most important choices of all; what type of healthcare plan is right for you and your family?
More specifically, we’ll discuss the pros and cons of the high-deductible health plan (HDHP) paired with the Health Savings Account (HSA).
A Health Savings Account is what the name implies: a tax-advantaged savings account used for healthcare expenses. The HSA account is like no other investment account because it is the only one that offers triple tax savings.
1. Contributions to a Health Savings Account (HSA) are tax deductible.
For example; If you are in the 24% marginal tax bracket, married filing jointly, and you maximize your HSA annually, your tax savings could be $2,052 ($8,550 x 0.24).
2. You can invest the contributions to your HSA and they grow tax-free similar to a 401 (k) or IRA.
Depending on the employer, HSAs typically require a minimum balance of $2,000 before allowing investment of additional funds.
3. When monies are withdrawn for qualified medical expenses, there is no tax due on the distribution.
Note: There could be a 20% penalty and taxes for using the HSA for non-qualified expenses.
If you withdraw funds from the HSA after you turn 65, you will not be penalized for non-medical expenses. For example, you could use your HSA to purchase a car at age 65, but you will owe ordinary income taxes, similar to a pre-tax 401 (k)/IRA distribution.
Possible HSA strategy
Many people (including myself) plan to use the HSA like a medical 401 (k). Consider saving the maximum annual amount and only withdraw monies for large medical expenses you can’t cover with your regular cash flow. Qualified medical expenses still count towards your annual deductible, whether you used the HSA or out-of-pocket cash to pay the expenses. This strategy allows the most savings, investing and tax deferral to work for you over time.
Log Your Expenses & Save your Receipts!
Be sure to save all medical expense receipts regardless of whether you use your HSA or out-of-pocket cash to pay.
Even years later, since the IRS does not impose a time limit, you may reimburse yourself tax-free from your HSA for the qualified medical expenses you paid out-of-pocket. This strategy not only preserves the tax advantages of the account but also creates a reserve of reimbursable expenses that can be tapped in the future. In the event of an unexpected non-medical emergency, you could withdraw funds from your HSA tax-free by matching them to unreimbursed medical receipts.
Here is a short list of typical eligible medical expenses that qualify to be paid from the HSA:
- Prescriptions and medications
- Dental work
- Vision care
- Over-the-counter drugs and medical supplies
- Preventative care
- Physical therapy, chiropractic and psychiatric care
- Medicare premiums
- Long term care premiums
Here is a short list of non-eligible medical expenses:
- Cosmetic surgery
- Medical insurance premiums; exceptions noted above
- Vitamins
For a more detailed listing of eligible expenses see IRS Publication 502.
The Numbers: HDHP and HSA Details
After enrolling in your airline’s HDHP, your contributions to an HSA are immediately vested and can be made by both you and your employer. Your new HSA is also portable, in case you’re worried about an employer change in the future. The 2025 annual contribution limit is $4,300 if single, $8,550 if married. Individuals age 55 and older may contribute an additional $1,000 annually as a catch-up contribution.
Are the HDHP & HSA Right for You?
Although HSAs have great tax savings attributes, the most important factor in your decision on whether or not to select a High-Deductible Health Savings Plan is your current medical circumstances. Below are a few factors to consider when determining whether an HDHP and HSA are right for you:
Health History
- If your family’s health circumstances require frequent doctor visits or ongoing treatment, dealing with the higher and consistent out-of-pocket costs for care associated with the HDHP may be too much of a burden on both your finances and peace of mind.
Health Care Coverage
- To contribute to an HSA, the IRS requires that you be exclusively covered by an HDHP. Examples of disqualifying coverage include TRICARE or Medicare. (e.g., if you use TRICARE as primary or backup healthcare, you cannot contribute to an HSA).
- Important note: For Medicare specifically, there is a lookback period of coverage for 6 months prior to enrolling, meaning you cannot contribute to an HSA for that period of time.
VA Medical Benefits
- You may be temporarily ineligible to contribute to an HSA if you have received Veterans Affairs medical benefits within the past 3 months.
Ok, so HSAs are great and could be helpful if they fit with what you need. Fantastic. That said, there are a few important considerations you should be aware of, apart from the bullet points I mentioned above.
Paperwork
- Besides filing the IRS Form 8889 with your tax return, the IRS recommends keeping receipts for medical services and evidence of whether or not you were reimbursed. The lookback period for an audit can extend up to 7 years, so there’s a bit of due diligence that’s required for keeping track of everything.
Penalties for Non-Medical Use
- If you find yourself needing to dip into your HSA for non-medical expenses, you’ll be penalized. On top of income tax being subtracted from the amount you withdraw, the IRS excises a 20% penalty.
HSAs May Be Worth the Effort… or Not!
If you’re weighing the decision, remember: HSAs are best used as a long-term strategy. They reward patience, diligent tracking, and the willingness to take on some risk for long-term gain. If the paperwork and potential out-of-pocket expenses seem manageable, and you like the idea of combining retirement planning with tax-advantaged healthcare spending, then opening an HSA this enrollment season may be a smart move. If not, that’s fine too. The best plan is the one that gives you peace of mind and helps you sleep at night.
Charles Mattingly, MBA, CFP® | CEO & Lead Planner
Leading Edge Financial Planning
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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning and are subject to change at any time due to the changes in market or economic conditions.
