The U.S. is infamous for its high medical costs, but, like Japan, there is no public medical insurance such as national health insurance or social insurance, and each individual must enroll in private medical insurance plan through employer or by himself/herself.
There are countless private medical insurance plans, and you’re wondering which one to choose.
Of course, the medical insurance you need to sign up for will depend on your circumstances, but from a tax-saving perspective, it is highly recommended that you take out insurance with a Health Savings Account (HSA).
What is the Health Savings Account (HSA)?
An HSA is a tax-advantaged medical savings account that can be accompanied with medical insurance plans called the High Deductible Health Plan (HDHP).
It is an account like the medical expense version of the IRA, which is a personal pension account in the United States, and through the HSA, you can enjoy various tax incentives, and in the event of injury or illness, you can pay medical expenses through the HSA.
HSA contributions can be made by both employers and employees. In 2021, the annual contribution limit is $3,600 for individuals and $7,200 for households (an additional $1,000 for those aged 55 and over).
The amount of money that employers contribute to HSA is optional, but like matching by 401 (k) employers, it’s a great benefit for employees!
HSA is highly recommended because you can enjoy tax exempt for amounts contributed to the HSA, capital gains earned through the HSA, and qualified medical expenses paid through the HSA.
There is a similar system called the Flexible Spending Account (FSA), but in the case of an FSA, if you don’t use the contribution amount by the end of the year, you’re going to lose that balance.
On the other hand, HSAs can basically carry over indefinitely even if you cannot use up the balance by the end of the year.
In addition, if you turn 65 or later, you can use the money saved in HSA for any purpose without penalty if you pay the tax on the amount you draw.
What is the High Deductible Health Plan (HDHP)?
In order to have an HSA, you must have insurance that falls under HDHP.
In order to be recognized as HDHP, the annual deductible must be $1,400 or more ($2,800 for households) in 2021, and the out of pocket maximum must be no more than $7,000 ($14,000 for households).
HDHP, as the name says, has a higher deductible than other medical insurance, but the insurance premium itself is usually set lower, saving you a lot of insurance fees if you don’t get too sick, and using HSA can provide tax benefits and long-term investment benefits.
How to Enroll and How to Use
If your employer offers a private medical insurance plan that offers HDHP and HSA, you can use HSA if you join it, but if your employer doesn’t offer these plans, you can personally open an HSA at your bank or investment firm’s at their office or online.
If you hold an HSA, you will be issued a debit card, so you will use this card to pay for medical and pharmaceutical expenses from this account.
HSA can be used for a qualifying medical expense, which includes not only medical expenses at the hospital, but also prescription fees, the cost of purchasing glasses and contact lenses, dental costs, and some over-the-counter medicines.
Also, as I wrote in a separate article, it was recently announced that HSA can be used for the cost of purchasing masks and sanitizer.
To learn more about qualified medical expenses available to HSAs, please see Publication 502: Medical and Dental Expenses issued by the IRS.
https://www.irs.gov/pub/irs-pdf/p502.pdf
In addition, even if you move outside the United States such as Japan in the future, if you meet the conditions, you can pay medical expenses at medical institutions outside the United States with HSA.
Caution
If you use the money in your HSA account for purposes other than qualified medical expenses, you will be fined 20% on top of the regular income tax.
However, as mentioned earlier, if you are 65 years old or over, you will have income tax, but you can withdraw money from the HSA without any penalty.
Since HSA is a federal system, some states do not allow tax incentives.
As of 2021, California and New Jersey do not allow HSA tax incentives, but basically, if you are a resident in other states, you can receive the tax benefits for state tax purposes.
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