Health Savings Accounts are increasing in popularity due to participants’ ability to reduce healthcare expenses, save on taxes, and put additional money aside for retirement. HSAs have been available since 2005, and people have many questions about how to qualify for an account, what expenses are eligible, how to open an account, and other Health Savings Account FAQs.
Here’s what you need to know about these powerful tax-advantaged tools.
Health Savings Account FAQs
What does HSA stand for?
HSA is an acronym for “Health Savings Account.”
What is an HSA?
The IRS defines a Health Savings Account as “a tax-exempt trust or custodial account set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur.” Simply put, an HSA is a tax-advantaged savings account in which the funds can be used to pay for a variety of IRS-approved medical and healthcare expenses. The primary advantage is that the money can be deposited into and withdrawn from the account tax-free, providing significant savings when paying for approved healthcare expenses.
How do I qualify for an HSA?
To be eligible to enroll in a Health Savings Account, individuals must meet several requirements as outlined by the IRS:
- Must participate in a high deductible healthcare plan (HDHP)
- May not have any additional health coverage (certain exceptions are permitted)
- May not be enrolled in Medicare
- Cannot be claimed as a dependent on someone else’s tax return.
What is a high deductible health plan (HDHP)?
An HDHP is a health insurance plan that has lower premiums and higher deductible than traditional health plans. The premium is the amount of money consumers pay each month for the plan. The deductible is the amount of money the plan holder is responsible for paying when receiving healthcare services. The goal with HDHPs is to reduce healthcare costs by making people better consumers of healthcare.
How do I know if my HDHP is HSA-qualified?
An HSA-qualified HDHP must:
- Meet the out-of-pocket maximum. In 2018, that’s $6,650 for individuals and $13,300 for families.
- Meet the minimum deductible.
- Must not offer any benefit beyond preventative care before meeting the annual deductible. This includes things like non-preventative prescription drugs covered by a co-pay, without having to first meet the annual deductible.
How does an HSA work?
With each paycheck, you deposit a fixed amount of money into the account on a pre-tax basis. You can make contributions until age 65. As you incur medical expenses, you can withdraw money to pay for them without owing taxes on the withdrawals. Also, any unused money in the account can accrue tax-free interest for as long as it remains in your account.
Who owns an HSA?
Unlike similar types of healthcare accounts – such as Flexible Spending Accounts (FSAs) and Healthcare Reimbursement Arrangements (HRAs) – you own the HSA. You can take your account with you when you change employers, and the money remains yours until you use it all or close the account.
How much can I contribute to my HSA?
In 2018, individuals can contribute a maximum of $3,450 per year; families up to $6,900. HSA participants age 55 or older are allowed to make a “catch up” contribution of $1,000 annually.
The IRS recently announced 2019 HSA contribution limits. The annual contribution limit for individuals with self-only coverage will go up by $50 to $3,500, while those with family coverage will see an increase of $100 to $7,000.
What can I use my HSA for?
In order to maintain their tax-free status, HSA funds must be used for qualified medical expenses as described in Section 213(d) of the Internal Revenue Service. These include a wide variety of medical services, including dental and vision, that involve the diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. HSA funds can also be used for many over-the-counter healthcare products. An HSA can also be used as a savings/investment account because the money stays in the account until you use it. This makes HSAs a valuable tool for adding to your retirement savings because any interest earned on the money is tax-free.
Does an HSA roll over?
Yes. In fact, because the funds in the account belong to you, they automatically roll over each year and remain in the account indefinitely until you use them. “Roll over” is a term used to describe the process of letting any unused money in the account at the end of a plan year remain in the account for use in the upcoming year. Other types of healthcare accounts have a “use it or lose” requirement, meaning you forfeit some or all of any unused funds still in the account at the end of the plan year.
Can I use my HSA for my spouse?
Yes. HSA funds can be used for any approved healthcare expenses incurred by your spouse and family (legal dependents).
How can I set up an HSA?
If your employer does not offer an HSA, you can easily set up an account through a bank, credit union, broker, insurance company or financial advisor. Because HSAs can be used as savings accounts to augment your retirement savings, it pays to treat them like an investment account. Avoid plans with high administrative fees. Look for a provider with a quick, efficient process for withdrawing funds or getting reimbursed for your medical expenses. Understand your investment options. Make sure the plan has a debit card and allows you to manage your account online.
Can I withdraw money from my HSA?
Yes. You can withdraw funds at any time for any purpose. However, the money must be used for qualified healthcare expenses in order to retain its tax-free status.
Can I withdraw money from my HSA for non-medical purposes?
Yes. Keep in mind that any funds withdrawn and used for non-qualified medical expenses will be taxed at your income tax rate plus a 20% penalty if you have not reached age 65. After age 65, HSA funds can be used for any purpose without incurring a tax penalty.
Who can contribute to an HSA?
You and your employer can contribute to your account. In addition, anyone can make a contribution on your behalf, including family members.
Can you change HSA contributions mid-year?
Yes. You may change the amount you deposit into your HSA account at any time during the plan year. If you make contributions from your paycheck, be sure to notify your employer of the change. You are also allowed to make non-payroll contributions using your online account management portal. Keep in mind that any contributions that exceed the maximum limit in any plan year will be taxable. Learn more about how a mid-year change of status impacts HSA contribution limits.
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