How much do you know about Health Savings Accounts (HSAs)? You must be enrolled in an HSA-qualified, high-deductible health plan (HDHP) before opening an HSA. But why would you want to? Here are 10 things to know about HSAs.
Unlike a Flexible Spending Account (FSA) or a Health Reimbursement Arrangement (HRA), both of which are owned by the employer, individuals own their HSAs. If you leave your job for any reason, the HSA goes with you. Even if your employer contributed some of the money to your account, it belongs to you permanently.
2. Triple Tax Savings
HSA owners enjoy triple tax savings. First, contributions you make to the account are deducted from your paycheck before taxes are calculated, so they are tax-free. Second, interest earned on the account balance and gains earned on invested portions of the balance is all tax-free. Last but not least, withdrawals for qualified medical expenses are tax-free. That can add up!
3. Flexible Contributions
With an HSA, you can change the amount you contribute during the plan year. For instance, if you initially elect to contribute $300 a month, but then in July you want to reduce to $150 a month, HSA regulations allow that for any reason.
4. Funds Roll Over
Any funds left in your HSA account at the end of a plan year automatically roll over to the next plan year. There’s no limit on the amount that can roll over, so you can build the balance for later use.
5. Investment Options
Once you meet your HSA provider’s minimum balance (usually between $1,000 and $2,500), unused balances become eligible for investing. This can help you grow your account balance quickly, and your gains are not taxed.
6. Prior Medical Expenses Eligible
As long as a qualified medical expense occurred while your HSA account was open, you can pay for it using HSA funds at any time. Say you opened your HSA on January 1, 2020. You purchased a pair of prescription sunglasses that summer but decided not to use your HSA account at the time. In July 2024, you come across that old receipt and think about something you’d like to use that money for. As long as you didn’t use HSA funds to buy the sunglasses or reimburse yourself for the purchase at any time since you bought them, you can do so then.
7. Retirement Income Option
Once you reach the age of 65, you can withdraw funds from your HSA without penalty, even if it’s not for a qualified expense. However, withdrawals for any reason other than an eligible expense will be taxed as ordinary income, just like withdrawals from 401(k) accounts are.
8. Catch-up Contributions
Beginning in the year in which you turn 55, you can make ‘catch-up’ contributions of up to $1,000 over the annual regulatory contribution limit and continue doing so each year after that. This lets you grow your balance more quickly as you approach retirement.
9. COBRA and Medicare Premiums are Eligible
Unlike other healthcare spending accounts, you can use HSA funds to pay for COBRA insurance continuation premiums and for Medicare Part B, D, and Medicare Advantage premiums. However, HSAs cannot be used to pay for Medigap insurance premiums.
10. Change in Healthcare Plans? No Problem
Once you open an HSA, the funds in it are yours for life. If you switch healthcare plans and are no longer enrolled in an active HSA-qualified plan, you can no longer make contributions to your HSA but can continue spending out the existing balance. If you later enroll in another HSA-eligible plan, you can start making contributions again.
There you go — 10 things you need to know about HSA accounts. Now you know why they are so popular! For more information, contact your TPA or benefits administrator.
DataPath, Inc. creates flexible, cloud-based HSA management software solutions.