What is an HSA, or Health Savings Account?

A Health Savings Account (HSA) is a type of savings account that allows individuals with high deductible health plans (HDHPs) to save money on a pre-tax basis to pay for qualified medical expenses. These expenses can include deductibles, co-payments, and other out-of-pocket expenses related to medical care.

Contributions to an HSA are tax-deductible and grow tax-free. Any withdrawals made for qualified medical expenses are also tax-free. Additionally, funds in an HSA can roll over from year to year and can be invested in a variety of ways, similar to a retirement account.

To be eligible to contribute to an HSA, an individual must have a qualified HDHP and not be covered by any other non-HDHP health plan. Employers may also contribute to their employees’ HSAs.

HSAs can provide individuals with a way to save money on medical expenses while also taking advantage of tax benefits. However, it’s important to understand the rules and limitations of HSAs, as well as the potential fees and expenses associated with them.

In a nutshell an HSA works like this.  You have a high-deductible health insurance plan couples with an tax-advantaged savings account.  You can then spend the money to cover health care expenses without federal income tax on the fund from the account.

What are some of the rules and regulations surrounding HSAs:

1. Eligibility: To contribute to an HSA, an individual must have a qualified high-deductible health plan (HDHP). The HDHP must have a minimum deductible and maximum out-of-pocket limit set by the IRS each year. Additionally, the individual cannot be covered by any other non-HDHP health plan, including Medicare.
2. Contribution limits: The contribution limit for an HSA is set annually by the IRS. For 2022, the contribution limit is $3,650 for individuals and $7,300 for families. Individuals who are 55 or older can contribute an additional $1,000 per year as a catch-up contribution. (note: The contribution limit for Health Savings Accounts (HSAs) in 2023 has not yet been announced by the IRS. The IRS typically sets the contribution limits for HSAs in the fall of the previous year, so the contribution limit for 2023 will likely be announced in the fall of 2022. It’s important to note that the contribution limit can change from year to year, based on inflation adjustments and other factors)
3. Tax benefits: Contributions to an HSA are tax-deductible, and any interest or investment earnings on the account grow tax-free. Withdrawals made for qualified medical expenses are also tax-free.
4. Qualified medical expenses: HSAs can be used to pay for qualified medical expenses, including deductibles, copayments, prescription drugs, and certain medical procedures. However, there are limitations on what expenses are considered qualified, and using HSA funds for non-qualified expenses can result in penalties and taxes.
5. Rollovers and portability: Funds in an HSA can roll over from year to year and can be invested in a variety of ways, similar to a retirement account. Additionally, HSAs are portable, meaning that the account can be transferred to a new employer or individual if the account holder changes jobs or health insurance plans.
6. Fees and expenses: HSAs may have fees and expenses associated with them, including account maintenance fees, investment fees, and transaction fees.
7. Penalties for non-qualified expenses: If HSA funds are withdrawn for non-qualified expenses, the withdrawal may be subject to income tax and a 20% penalty.

It’s important to fully understand the rules and regulations surrounding HSAs before opening one and contributing funds. Consider speaking with a financial advisor or benefits specialist to answer any questions specific to your situation.

What is the deadline for contributing to an HSA?

The deadline for contributing to an HSA (Health Savings Account) is April 15th of the following year or the tax-filing deadline for the previous year, whichever is earlier. This means that for the tax year 2022, the HSA contribution deadline is April 15, 2023.

However, if you file for an extension to file your tax return, the deadline for contributing to your HSA is also extended until the extension deadline, which is usually October 15th. It’s important to note that you must have an HSA-eligible health insurance plan in place before you can contribute to your HSA.

Additionally, contributions made after the tax-filing deadline but before the contribution deadline can be counted towards the previous year’s contributions for tax purposes.

What can I use my HSA funds for?

You can use the money in your HSA (Health Savings Account) funds to pay for qualified medical expenses, which are expenses related to the diagnosis, cure, treatment, or prevention of a disease or condition, as well as certain medical expenses related to dental and vision care. Examples of qualified medical expenses that can be paid for using HSA funds include:

1. Deductibles, copayments, and coinsurance payments for medical care
2. Prescription drugs and insulin
3. Dental care, including braces and dentures
4. Eye exams, glasses, and contact lenses
5. Hearing aids and related expenses
6. Psychiatric care and therapy
7. Certain medical equipment, such as crutches or wheelchairs
8. Long-term care services
9. Certain medical procedures, such as surgery or diagnostic tests

It’s important to note that there are limitations on what expenses are considered qualified, and using HSA funds for non-qualified expenses can result in penalties and taxes. Additionally, expenses incurred before the HSA was established are not considered qualified medical expenses. It’s a good idea to keep all receipts and documentation for expenses paid for using HSA funds in case of an IRS audit.

How can I use my HSA to pay for long-term care expenses?

You can use your HSA (Health Savings Account) to pay for certain long-term care (LTC) expenses, but only if the expenses are considered qualified medical expenses by the IRS. Generally, long-term care expenses must be considered necessary medical care to be eligible for HSA reimbursement. The following are examples of qualified long-term care expenses:

1. Eligible long-term care insurance premiums
2. Charges for inpatient care at a nursing home, assisted living facility, or other LTC facility
3. Home healthcare services provided by a licensed healthcare provider
4. Adult daycare and respite care expenses
5. Medical equipment and supplies necessary for the care of a chronically ill individual

It’s important to note that not all long-term care expenses are considered qualified medical expenses, and using HSA funds for non-qualified expenses can result in penalties and taxes. Additionally, the expenses must be for care related to a chronic or long-term condition, rather than for general custodial care. It’s a good idea to consult with a tax professional or financial advisor if you have questions about using your HSA to pay for long-term care expenses.

Can I use my HSA funds for over the counter medications?

Yes, HSA (Health Savings Account) funds can be used for over-the-counter medications, but only certain types. The Consolidated Appropriations Act of 2021 reinstated the ability to use HSA funds for the purchase of over-the-counter medications without a prescription, effective January 1, 2021.

However, there are some restrictions on the types of over-the-counter medications that are eligible for HSA reimbursement. Only medications or treatments that are specifically intended to treat a medical condition or illness can be reimbursed with HSA funds. For example, you can use HSA funds to purchase over-the-counter pain relievers, allergy medications, and cough and cold remedies. However, you cannot use HSA funds to purchase over-the-counter vitamins or dietary supplements, unless they are recommended by a medical professional to treat a specific medical condition.

As with all HSA expenditures, it’s important to keep detailed records and receipts for any over-the-counter medications you purchase with HSA funds. This will help you avoid any potential tax penalties or audits related to your HSA usage

Can I use my HSA to pay for health insurance premiums?

Generally, you cannot use your HSA (Health Savings Account) to pay for health insurance premiums. However, there are some exceptions. You can use your HSA funds to pay for health insurance premiums if:

1. You are receiving federal or state unemployment benefits
2. You are over 65 and are paying for Medicare Part A, Part B, or Part D premiums
3. You are under 65 and are paying for premiums for a qualified long-term care insurance policy
4. You are paying for continuation coverage (COBRA) after leaving a job that provided health insurance

In these situations, you can use your HSA funds to pay for the premiums with tax-free funds. However, in most other cases, using HSA funds to pay for health insurance premiums will result in penalties and taxes. It’s important to note that using HSA funds to pay for qualified medical expenses is always tax-free, regardless of whether the expenses are paid for out of pocket or with HSA funds.

Can I use my HSA to pay for expenses for my spouse or dependents?

Yes, you can use your HSA (Health Savings Account) funds to pay for qualified medical expenses for your spouse and dependents, even if they are not covered by your HSA-eligible health insurance plan. The IRS allows HSA funds to be used for the qualified medical expenses of the HSA account holder, their spouse, and any dependents claimed on their tax return, regardless of whether the dependents are covered by the HSA-eligible health insurance plan.

It’s important to note that if your spouse or dependents have their own HSA accounts, they cannot use your HSA funds to pay for their qualified medical expenses. Each HSA account is owned and funded separately, and HSA funds cannot be transferred between accounts. Additionally, if you are claiming a tax deduction for contributions made to your HSA, you must be able to claim the individual as a dependent on your tax return in order to use HSA funds to pay for their qualified medical expenses.

What are the tax benefits of contributing to an HSA?

Contributing to an HSA (Health Savings Account) can provide several tax benefits, including:

1. Tax-deductible contributions: HSA contributions are tax-deductible, which means that the amount you contribute to your HSA reduces your taxable income for the year. For example, if you contribute $5,000 to your HSA in a given year and your marginal tax rate is 25%, you can reduce your tax bill by up to $1,250.
2. Tax-free growth: HSA funds grow tax-free, which means that you don’t have to pay taxes on any interest, dividends, or capital gains earned on your HSA investments. This can help your HSA funds grow faster over time.
3. Tax-free withdrawals: If you use HSA funds to pay for qualified medical expenses, you can withdraw the funds tax-free. This includes both the original contributions and any earnings on those contributions. This can provide a significant tax advantage compared to using after-tax funds to pay for medical expenses.
4. No tax on rollovers or transfers: If you transfer or rollover funds from one HSA to another, or if you make a one-time rollover from an IRA to an HSA, you can do so tax-free. This can provide flexibility in managing your HSA funds and can help you optimize your tax strategy.

Overall, contributing to an HSA can provide significant tax savings for individuals who are eligible to open and contribute to an HSA.

Can I invest my HSA funds?

Yes, you can invest your HSA (Health Savings Account) funds in a range of investment options, depending on the HSA provider you choose. HSA providers may offer investment options such as mutual funds, exchange-traded funds (ETFs), and individual stocks and bonds.

Investing your HSA funds can provide several benefits, including the potential for higher returns compared to a traditional savings account, the ability to grow your HSA balance over time, and the flexibility to use your HSA funds for qualified medical expenses in the future.

However, it’s important to consider the risks associated with investing before making investment decisions with your HSA funds. Investments can fluctuate in value, and there is always the potential for loss. Additionally, if you need to withdraw HSA funds for non-qualified medical expenses before age 65, you will owe taxes on the withdrawn amount plus a 20% penalty.

It’s important to do your research and consider your risk tolerance and investment goals before investing your HSA funds. You may also want to consult with a financial advisor or tax professional to ensure that you are making informed investment decisions that align with your overall financial plan.

Are there any fees associated with an HSA?

Yes, there can be fees associated with an HSA (Health Savings Account), depending on the HSA provider you choose and the specific features of the account. Some common fees associated with HSAs include:

1. Maintenance fees: Some HSA providers may charge a monthly or annual maintenance fee to cover the costs of maintaining your account.
2. Investment fees: If you choose to invest your HSA funds in mutual funds, ETFs, or other investment options, you may be subject to investment fees, such as expense ratios, trading fees, or management fees.
3. Transaction fees: Some HSA providers may charge transaction fees for certain actions, such as transferring funds or closing your account.
4. ATM fees: If you use an ATM to withdraw HSA funds, you may be subject to ATM fees.
5. Overdraft fees: If you overdraw your HSA account, you may be subject to overdraft fees.

It’s important to compare the fees associated with different HSA providers and to choose an account that offers reasonable fees and features that align with your needs. Some HSA providers may waive fees if you meet certain requirements, such as maintaining a minimum account balance or using certain investment options. Additionally, some employers may offer HSA accounts with lower fees as a benefit to their employees.

How do I withdraw money from my HSA?

To withdraw money from your HSA (Health Savings Account), you can typically use a debit card linked to your HSA or request a reimbursement for eligible expenses that you have already paid out of pocket. Here are the steps to withdraw money from your HSA:

1. Keep track of your medical expenses: Before withdrawing funds from your HSA, you should keep track of your medical expenses and ensure that the expenses are eligible for HSA reimbursement. You can refer to the IRS publication 502 for a list of eligible expenses.
2. Use your HSA debit card: If you have a debit card linked to your HSA, you can use the card to pay for eligible medical expenses directly. Make sure to keep your receipts in case you need to provide documentation of the expense.
3. Request a reimbursement: If you have already paid for eligible expenses out of pocket, you can request a reimbursement from your HSA provider. Typically, you will need to submit a claim form or provide documentation of the expense, such as a receipt or an explanation of benefits (EOB) statement from your health insurance provider.
4. Transfer funds: If you need to transfer funds from your HSA to your bank account, you can typically do so through your HSA provider’s online portal or by contacting customer service.

It’s important to remember that you should only withdraw funds from your HSA for eligible medical expenses to avoid having to pay income tax and other penalties.

What are the penalties for withdrawing money from an HSA for non-qualified expenses?

If you withdraw money from your HSA (Health Savings Account) for non-qualified expenses before age 65, you will be subject to taxes and penalties. Specifically, the withdrawal will be treated as taxable income, and you will owe income taxes on the withdrawn amount. Additionally, you will be subject to a 20% penalty on the withdrawn amount.

For example, if you withdraw $1,000 from your HSA for non-qualified expenses before age 65 and you are in the 25% tax bracket, you would owe $250 in income taxes and a $200 penalty, for a total of $450 in taxes and penalties.

It’s important to only withdraw money from your HSA for eligible medical expenses in order to avoid taxes and penalties. Eligible medical expenses include a wide range of healthcare expenses, such as doctor’s visits, prescription medications, and certain medical devices. You can refer to the IRS publication 502 for a list of eligible expenses. Additionally, if you are age 65 or older, you can withdraw money from your HSA for non-medical expenses without penalty, although you will owe income taxes on the withdrawn amount.

How do I track my HSA contributions and expenses for tax purposes?

To track your HSA (Health Savings Account) contributions and expenses for tax purposes, you should keep detailed records of your HSA activity throughout the year. Here are some tips for tracking your HSA contributions and expenses:

1. Keep track of your contributions: Each time you make a contribution to your HSA, make sure to record the amount and date of the contribution. Your HSA provider should provide you with a year-end statement that summarizes your contributions for the year.
2. Track your HSA expenses: Keep track of all of your medical expenses that are eligible for HSA reimbursement. This includes expenses such as doctor’s visits, prescription medications, and certain medical devices. Make sure to keep receipts or other documentation of your expenses, as you may need to provide proof of the expense when requesting a reimbursement from your HSA.
3. Use HSA tracking tools: Many HSA providers offer online tools or apps that can help you track your HSA contributions and expenses. These tools may allow you to view your account balance, track your spending, and set up alerts for low balances or account activity.
4. Consult with a tax professional: If you are unsure about how to track your HSA activity or how to report it on your taxes, it may be helpful to consult with a tax professional. They can provide guidance on the specific tax rules and regulations surrounding HSAs and help ensure that you are properly tracking and reporting your HSA activity.

Remember that it’s important to track your HSA activity throughout the year, as this will help you maximize your tax benefits and avoid penalties for using HSA funds for non-qualified expenses. It’s also a good idea to review your HSA activity regularly to ensure that you are using your account in the most effective way possible.

Here are some popular HSA tracking tools that may be useful for managing your HSA account:

1. HSA Bank: HSA Bank offers an online portal and mobile app that allows you to track your HSA balance, monitor account activity, and manage your investments.
2. Fidelity HSA: Fidelity HSA offers an online platform that allows you to track your HSA contributions and expenses, view investment options, and manage your account.
3. HealthEquity: HealthEquity offers an online portal and mobile app that allows you to track your HSA balance, view transaction history, and set up automatic contributions.
4. Optum Bank: Optum Bank offers an online platform that allows you to track your HSA balance, view investment options, and manage your account.
5. Lively: Lively offers an online platform that allows you to track your HSA balance, monitor account activity, and manage your investments.

These are just a few examples of HSA tracking tools available on the market. It’s important to research different providers to find one that meets your specific needs and preferences. Keep in mind that some HSA providers may charge fees for certain services or transactions, so it’s important to review the fee schedule before choosing a provider.

Do I need to submit receipts for qualified medical expenses when withdrawing from my HSA?

Yes, if you are withdrawing funds from your HSA (Health Savings Account) to pay for qualified medical expenses, you will generally need to submit receipts or other documentation to show that the expenses are eligible for reimbursement.

The IRS requires that you keep “sufficient records” to show that your HSA withdrawals were used for qualified medical expenses. This means that you should keep receipts, bills, and other documentation that show the name of the patient, the date of service, the type of service or expense, and the amount paid.

When you withdraw funds from your HSA to pay for qualified medical expenses, you should keep a copy of the receipt or other documentation for your records. Some HSA providers may require you to submit the receipt or documentation to them in order to process the withdrawal.

It’s important to keep accurate records of your HSA transactions throughout the year so that you can easily provide documentation if needed. This will help you avoid penalties for using HSA funds for non-qualified expenses and ensure that you are maximizing your tax benefits.

What happens to my HSA if I change jobs or health insurance plans?

If you have an HSA (Health Savings Account) and you change jobs or health insurance plans, you can generally keep your HSA and continue to use the funds for eligible medical expenses.

Here’s what you need to know:

1. If you change jobs: If you have an HSA through your current employer and you change jobs, you can usually keep your HSA and continue to use the funds for eligible medical expenses. You can also continue to contribute to your HSA if you are eligible to do so under the new employer’s plan or if you open an individual HSA.
2. If you change health insurance plans: If you have an HSA and you change health insurance plans, you can generally keep your HSA and continue to use the funds for eligible medical expenses. However, you should make sure that the new health plan is HSA-qualified, meaning it has a high deductible that meets the IRS requirements for HSA contributions.
3. If you become ineligible to contribute to an HSA: If you become ineligible to contribute to an HSA, you can still use the funds in your HSA for eligible medical expenses. However, you cannot make any new contributions to your HSA unless you become eligible again in the future.

Can I have more than one HSA?

No, you cannot have more than one HSA (Health Savings Account) at the same time. According to IRS rules, an individual can only contribute to one HSA per year.

If you have multiple HSA accounts, you will need to transfer or rollover the funds from the additional accounts into your primary HSA account. You can do this by requesting a direct transfer or rollover from your HSA provider.

However, if you have an HSA from a previous employer, you can still use the funds in that account for eligible medical expenses, even if you are no longer contributing to that account. You can also roll over funds from the previous employer’s HSA into your current HSA account, as long as it is an eligible rollover.

It’s important to note that if you contribute to more than one HSA in the same year, you may be subject to penalties and taxes. If you have any questions about HSA contributions or rollovers, you may want to consult with a tax professional or your HSA provider.

What happens to my HSA if I pass away?

If you have an HSA (Health Savings Account) and you pass away, the funds in your HSA become the property of your designated beneficiary. This means that your beneficiary can inherit the funds tax-free, but the rules for using the funds may change.

Here’s what you need to know:

1. Spouse as beneficiary: If your spouse is the designated beneficiary of your HSA, he or she can inherit the funds tax-free and use them for eligible medical expenses as if they were his or her own HSA.
2. Non-spouse as beneficiary: If a non-spouse is the designated beneficiary of your HSA, the funds will be distributed to the beneficiary as taxable income. The beneficiary can use the funds for eligible medical expenses, but he or she will not be able to contribute to the HSA.
3. No designated beneficiary: If you do not have a designated beneficiary for your HSA, the funds will be paid to your estate. The funds will be subject to estate taxes and will be distributed to your heirs according to your will or state law.

It’s important to note that if your spouse is not the designated beneficiary of your HSA and you live in a community property state, your spouse may still be entitled to a portion of the funds. You may want to consult with a tax professional or estate planning attorney to determine the best course of action for your HSA in the event of your death.

Can I contribute to an HSA if I have Medicare?

If you have Medicare, you are generally no longer eligible to contribute to an HSA (Health Savings Account). To be eligible to contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP) and not be enrolled in any other health coverage that is not an HDHP, including Medicare.

However, if you were eligible to contribute to an HSA before you enrolled in Medicare, you can still use the funds in your HSA to pay for eligible medical expenses tax-free, even if you are no longer contributing to the HSA. Additionally, if you are age 65 or older and are still working and covered by an HDHP, you can delay enrolling in Medicare Part A and continue to contribute to your HSA.

It’s important to note that if you have already contributed to an HSA and then enroll in Medicare, you may be subject to tax penalties if you continue to contribute to your HSA. You may want to consult with a tax professional or your HSA provider if you have any questions about HSA contributions and Medicare.

How do I open an HSA?

To open an HSA (Health Savings Account), follow these steps:

1. Determine your eligibility: To be eligible for an HSA, you must be enrolled in a high-deductible health plan (HDHP). Check with your health insurance provider to see if your plan qualifies as an HDHP.
2. Find an HSA custodian: Once you confirm your eligibility, you will need to find an HSA provider. This can be a bank, credit union, insurance company, or other financial institution that offers HSA accounts. You may want to shop around to compare fees, interest rates, and investment options.
3. Complete the application: Once you choose an HSA provider, you will need to complete an application. You may need to provide personal information, such as your name, address, date of birth, and Social Security number.
4. Fund the account: Once your HSA account is set up, you will need to fund it. You can make contributions to your HSA through payroll deductions, online transfers, or by mailing a check to your HSA provider.
5. Keep track of your expenses: To ensure you are using your HSA funds for qualified medical expenses, you should keep track of your health care costs and save receipts. You may also want to keep a separate record of your HSA contributions and withdrawals for tax purposes.

It’s important to note that HSA rules and regulations can be complex, and it may be helpful to consult with a financial advisor or tax professional to ensure you are maximizing the benefits of your HSA.

In conclusion, Health Savings Accounts (HSAs) can be a valuable tool for individuals and families looking to save money on health expenses, but are not a personal savings account. HSAs offer numerous benefits, including tax advantages, investment opportunities, and flexibility in how funds can be used.  Remember, its an account that can be used to pay medical expenses, can provide investment returns and even retirement savings.  It’s a great way to help you save money and reduce health-related expenses in retirement.

However, navigating the rules and regulations surrounding HSAs can be complex, and it’s important to understand the eligibility requirements, contribution limits, qualified medical expenses, and withdrawal rules before opening an HSA account.

If you are considering opening an HSA account, it may be helpful to consult with a financial advisor or tax professional to ensure you are maximizing the benefits of your HSA and avoiding any potential tax penalties or audits.

Overall, HSAs can be a smart choice for those who want to save for future healthcare expenses and take control of their healthcare spending. With careful planning and management, an HSA can be a valuable addition to your financial portfolio.