Whether you’ve decided to sign up for a High Deductible Health Plan (HDHP) and Health Savings Account (HSA) combination as an individual, or you’ve decided to offer the pairing as an employer, you probably know they can help you save on healthcare and insurance costs as well as reduce your tax liabilities. But in order to maximize the cost savings and tax benefits, you have to plan ahead.

The first step in planning is determining how much you will contribute to your HSA on a monthly or annual basis up to the annual contribution limit. There are many ways to do this. You can plan to max out your contributions, you can plan to save only what you’ll need to spend, you can base your contributions on the amount of taxes you want to save, or use another metric. Regardless of the amount you choose to contribute to your HSA, an HSA calculator can help make sure you reach your health and tax savings goals.

How much should I contribute?

Individuals and employers will have different goals when it comes to contributing to the HSAs. Individuals should look at their personal savings goals, as well as their expected medical needs and budget to determine their contribution strategy for the year. Employers will want to look at their benefits strategy, their budget, and consider how much they’re looking to save on health insurance costs when deciding how much (if any) they’ll contribute to employees’ accounts.

Individuals

When determining how much you’ll contribute to your HSA in a year, one goal to reach for is to “max out”. Maxing out means you contribute up to the annual limit set by the IRS each year. The annual contribution limit includes all of the contributions made to your account including yours, those of your employer and any money anyone else has given.

There are several reasons to max out your annual contributions if that is available to you:

• Tax savings. All HSA contributions up to the IRS annual limit are deducted from your federal income tax. Some states also deduct contributions from their income tax assessment. Your contributions grow tax free in your account and distributions on qualified medical expenses are tax free as well. That means you could save up to 37% on your medical expenses, depending on your tax bracket.
• The more you contribute, the faster your savings grow. This is because your HSA balance rolls over from year-to-year so you can benefit from compound interest. You also have the ability to invest your savings. If you invest your HSA contributions, you can grow your savings at the rate of the market and build quite a health savings nest egg for the future.
• At 65 your HSA turns into a traditional retirement account. That means you can spend your HSA savings on whatever you want. Distributions on qualified medical expenses remain tax-free (which is helpful since the average couple retiring today is expected to pay between $156,200 to $1 million on health care in retirement). Distributions on anything else are subject to the appropriate income tax rate.
• You can use your HSA to pay for qualified medical expenses for you, your spouse and your dependents, even if they aren’t covered by an High Deductible Health Plan (HDHP). This greatly expands the instances when you can and will use your savings.
• The list of qualified medical expenses for which you can use your HSA is extensive and might include more than you think.
• You can save for your medical rainy day or future family. Even if you’re young and single, it’s not too early to save for your future medical costs. These include starting a family, medical travel, a serious illness or accident that requires surgery, specialist care, physical therapy or medication.

If maxing out your contributions isn’t within reach this year, here are other savings goals you can use:

• Enough to pay for your deductible. The IRS sets the minimum annual deductible for individual and family HDHPs each year, but your deductible could be higher. By saving enough to cover your deductible you won’t have to worry about how you’ll pay for a medical cost that comes up prior to said deductible being met. Once your deductible is met, your health insurance should cover all or most of your medical care.
• Estimate the cost of your medical care needs for the coming year. This might be challenging since unexpected medical costs often arise, but a good place to start is looking at how much you’ve used the medical system in the previous three years and then adding in the cost of any procedures or prescriptions you know you’ll need this year. By budgeting to save for the medical care you think you’ll need will help ensure you have a tax-free way to pay for it.
• Estimate the tax savings you want or need. The tax breaks you get on your HSA contributions could be especially helpful if you have no or few other write offs.

One of the great things about HSAs is that you can always change the amount you contribute to your account mid-year. That means you can contribute a lump sum if you receive a bonus, sell an asset or receive a cash gift. Or, you can contribute incrementally throughout the year (or both). Also, if your financial circumstances change, you can change the amount you’re contributing to reflect that.

Keep in mind that with an HSA, you can only spend the balance that remains in the account (which is different from an FSA which makes the entire annual contribution pledge available on the first day of the plan year). So if you know you have an expense coming up, you might want to adjust your contributions accordingly so you can take full advantage of the tax benefits of an HSA when paying for said cost.

Employers

The HDHP/HSA pairing helps employers save on their FICA taxes, business taxes and the amount they spend on health insurance premiums. Employers should consider these savings when deciding whether or not they will contribute to employees’ accounts and how much they’ll offer.

• FICA taxes. Since HSA contributions are tax-free for the individual employees, they reduce the employees’ taxable income, which reduces the amount the employer owes in payroll tax. If employers want to encourage employee adoption of, and contribution to, their HSA, they might consider offering to contribute as well. Some employers offer a contribution match, some offer a flat amount, whichever you choose must be offered uniformly to all employees of the same employee class.
• Employer contributions are tax-free. Not just to the individuals but to the business as well. That enables companies to save on their business taxes.
• Health insurance premiums. HDHPs typically have the lowest health insurance premiums of the health plans and offering an HSA can help incentivize employees to choose this less expensive option.

Plan ahead with a contribution calculator

Once you’ve determined your health savings goals, it’s helpful to use a health savings calculator so you see what those contributions look like. Here’s how to use Lively’s contribution calculators to ensure you meet your health savings and tax savings goals.

Lively offers several different calculators because there are multiple ways to strategize your health savings.

Tax savings. If your primary goal is to save on taxes, Lively’s tax savings calculator allows you to play around with contribution amounts until you arrive at your desired savings. The information you’ll need is:

• Your health insurance plan type
• Your tax filing status
• Your state
• Your age
• Your retirement age
• Your income
• Your current HSA balance
• Your annual HSA expenses

Max HSA savings. If your primary concern is maximizing your health savings for the year, Lively offers a calculator to help ensure you reach this goal. The information you’ll need is:

• Your date of birth
• Your HDHP coverage type
• Your health plan start date

Meet your specific goals. If you have a more nuanced HSA contribution goal, Lively’s contribution goal calculator is a helpful tool. You can use it to determine the right amount to contribute on an annual basis for your specific health and financial situation. The information you’ll need is:

• Who the coverage is for (you or you and family).
• Annual income.
• Filing status.
• State.
• Current age.
• How much your employer will contribute on an annual basis (if at all).
• Your current HSA balance.
• How much you’ll expect to pay in medical expenses for the year.
• Your savings goal for the year.

You’ll have to answer a few questions about retirement goals and how you’ll intend to use your HSA in retirement, and then Lively’s calculator will not only tell you how much you should contribute on an annual and per paycheck basis, but your tax savings as well. If you have your account through Lively, the calculator will give you the option to change your contributions accordingly.

Reduce payroll taxes. This calculator for employers will help you demonstrate how much your company can save with an HSA. To use this calculator you will need to know:

• Average employer contribution
• Average employee contribution
• Number of employees

These calculators can help you get the most out of your HSAs and employers can use them to help their employees understand how much they can save with an HSA.

Get started with Lively

Lively’s HSA beats industry utilization averages and enjoys high customer satisfaction from both account holders and employers. Our easy-to-use platform makes it easy for account holders to save, invest, and manage their account. And if they have a question, our responsive, knowledgeable support team is there to help. If you’re ready to enable your employees to take advantage of all an HSA has to offer or open an account, reach out to us today.