HSA-eligible health plans for 2027: tax savings versus higher deductibles

Workers choosing their 2027 health insurance coverage face a decision that has become harder as healthcare affordability features in the midterm election's cost-of-living debate: whether an HSA-eligible plan with lower premiums and tax benefits is worth the higher deductible and potential out-of-pocket costs. It remains uncertain how a new Congress might address the affordability issue, according to CNBC.

The tax case for an HSA

Kalei Cadinha-Pua'a, vice chair and CEO of Honolulu-based Cadinha & Co., points to what she calls a "triple tax advantage." Employer and employee contributions go into the account before taxes, earnings are not taxed while they remain in the HSA, and withdrawals for qualified medical expenses are tax-free.

Financial advisors say workers often overlook a second break. Contributions made through an employer's Section 125 cafeteria plan generally are not subject to Social Security and Medicare taxes, said Andy Panko, a certified financial planner and enrolled agent who founded Tenon Financial in Metuchen, New Jersey. That can make payroll contributions more tax-efficient than contributing independently and claiming a deduction later. Workers who contribute outside payroll may be able to deduct eligible amounts on their federal return, but generally will not get the Social Security and Medicare tax break.

2027 rules and limits

HSAs are typically paired with a high-deductible health plan, and consumers generally must be enrolled in one to contribute. For 2027, the IRS says an HSA-eligible plan must generally have a deductible of at least $1,750 for individual coverage or $3,500 for family coverage. Annual out-of-pocket expenses, excluding premiums, cannot exceed $8,700 for individuals or $17,400 for families.

Contribution limits for 2027 are $4,500 for individuals and $9,000 for families, with a $1,000 catch-up contribution for people 55 and older.

More employers are offering the option. Among U.S. health plan sponsors with at least 50 employees, 63% offer a high-deductible plan that qualifies for an HSA, and 37% of employees covered by an employer health plan are enrolled in an HSA-eligible plan, according to a recent Marsh employer survey. Frank Easley, senior vice president of Aon Health Solutions, said employers often offer an HSA plan as a low-cost option that typically costs less for both employer and employee.

When a high-deductible plan may not fit

Tax advantages alone do not make an HSA-eligible plan the right choice. Nathan Lochstampfor, a certified financial planner and associate consultant at Conrad Siegel Investment Advisors, said workers should consider how premiums, deductibles and out-of-pocket maximums align with expected healthcare needs, along with any employer HSA contributions and the cash available to cover an unexpected medical bill before the deductible is met. If a consumer cannot afford a high-deductible plan's deductible, he said, a plan with higher premiums and lower out-of-pocket costs may make sense.

HSA money generally carries over from year to year and can be invested. As of midyear, 11% of HSA accounts held invested assets, according to Devenir. Advisors suggest keeping some of the balance in cash for short-term needs and investing the rest for retirement.

Some account holders pay current medical expenses out of pocket and reimburse themselves years later, provided the expense was qualified and incurred after the HSA was established. Records are needed to show those expenses were not also claimed as an itemized deduction. Cadinha-Pua'a recommends making digital copies of receipts, bills and proof of payment, organizing them in an electronic folder and backing that folder up to the cloud.

Source: CNBC.