A Health Savings Account (HSA) is a special purpose savings account that enables individuals participating in a High Deductible Health Plan (HDHP) to pay for qualifying healthcare expenses with pre-tax funds. You can use a HSA to pay for current health expenses, save for future qualified medical and retiree health expenses, and/or invest HSA contributions similar to 401(K)s or IRAs.
But there’s a lot more to know about health savings accounts — which is why we’ve put together this list of HSA FAQs, covering account basics, eligible expenses, contribution and investment options, and more.
You must be covered by a qualified High Deductible Health Plan (HDHP) to be able to take advantage of HSAs. An HDHP generally costs less than what traditional health care coverage costs, so the money that you save on insurance can then be put into the Health Savings Account. You own and control the money in your HSA. Decisions on how to spend the money are made by you without relying on a third party or a health insurer. You also decide what types of investments to make with the money in the account.
The rules for funding and accessing funds in an HSA are legislated by the IRS and are tax-free only if used for health care expenditures, but there are literally thousands of products and services that meet the approved health care expenditures requirements in Section 213(d) Medical Expenses as defined in the IRS code.
Qualified medical expenses under an HSA are defined as: medical copayments or coinsurance, long-term care costs, dental care costs, vision care costs, prescriptions medications and some over-the-counter medications. HSA funds can also be used to pay for COBRA or retiree medical insurance premiums. For a list of approved health care expenditures, please refer to Eligible Expenses.
Examples of expenses that are not HSA eligible include gym memberships, nutritional supplements, cosmetic procedures and surgeries.
Many over-the-counter items are eligible for purchase on a tax-free basis with your account.
Over the counter items fall into three categories: Eligible, Eligible with Prescription and Eligible with Letter of Medical Necessity, which is a letter from your Doctor stating that you’re using the item under a doctor’s directive.
If you do choose to purchase an item that requires a prescription or doctor’s directive, even though you will not be required to submit the prescription or doctor’s note, it is a best practice to hold onto these documents for your tax records.
You are responsible for that decision, and therefore should familiarize yourself with what qualified medical expenses are. You should also keep your receipts in case you need to defend your expenditures or decisions during an audit.
No. You cannot reimburse qualified medical expenses incurred before your account is established. We recommend you establish your account as soon as you are eligible to do so.
You can withdraw money from your HSA at any time for any purpose. If the money is used for an ineligible expense (whether medical or non-medical), the expenditure will be taxed and, for individuals who are not disabled or over age 65, subject to a 20% tax penalty. If you are 65 or older at the time of withdrawal, then you are free to withdraw money from your HSA for any purpose. You will have to pay the applicable income tax but there will be no additional tax penalty.
In 2017, the maximum contribution that can be made for employees with single coverage is $3,400, and the maximum contribution for employees with family coverage is $6,750.
The IRS has increased HSA limits for 2018, as announced in May 2017. In 2018, the maximum contribution that can be made for employees with single coverage is $3,450, and the maximum contribution for employees with family coverage is $6,900.
For both 2017 and 2018, individuals age 55 or older (and not yet enrolled in Medicare) can make additional “catch-up” contributions of up to $1,000 per person, which can provide extra help to many early retirees (see below).
Both individuals and employers can contribute to HSAs. Unspent HSA funds rollover into the next year.
Please note: These amounts are indexed annually for inflation. If you make a contribution for the entire tax year during your first year of HSA eligibility – when you only have part-year coverage – then you must remain in an HDHP and subsequently eligible for the HSA through the next full calendar year or must include the amount of this contribution (above and beyond what they could traditionally contribute) in gross income and be subject to an additional 10% tax.
You may make full year’s contribution into the HSA, even if you are eligible for only part of the year. If you make a contribution for the full year when you only had partial year HSA-eligibility, you must remain HSA-eligible through the last month of the following calendar year to avoid tax and penalty.
To be HSA-eligible, you must be covered by a HSA-qualified high deductible health plan and not be covered by any non-qualified health plans. Failure to maintain HSA eligibility (for reasons other than death or disability) for the required amount of time will result in income tax and a 10% additional tax on the contribution amounts attributable to the months before you had HDHP coverage and were HSA eligible.
If you think you may not remain HSA-eligible for the required amount of time, you may choose to make a partial year contribution (maximum contribution divided by 12 months multiplied the number of months eligible) to avoid taxes and penalty.
You can change the amount you contribute to your HSA at any time during the plan year. If you are changing the amount contributed via payroll on a pre-tax basis, check with your employer.
You can also make non-payroll contributions changes using the Contribution Center in your online account. This option allows you to make or change contributions on a recurring basis or one-time basis. Note: Contributions via the Contribution Center are made post-tax and can be deducted at tax time.
Contributions to HSAs can be made by you, your employer, or both. All contributions are aggregated to determine whether you have contributed the maximum allowed (see above). If your employer contributes some of the money, you can make up the difference. If your employer makes a contribution to your HSA, the contribution is not taxable to you the employee (excluded from income).
Individuals 55 and older who are covered by an HDHP can make additional catch-up contributions each year until they enroll in Medicare. The additional “catch-up” contribution limit is $1,000.
If you turned 55 partway through the year, and had HDHP coverage for the full year, you can make the full catch-up contribution regardless of when your 55th birthday falls during the year. If you did not have HDHP coverage for the full year, you must pro-rate your “catch-up” contribution for the number of full months you were “eligible”, i.e., had HDHP coverage.
Yes, if both spouses are eligible individuals and both spouses have established an HSA in their name. If only one spouse has an HSA in their name, only that spouse can make a “catch-up” contribution.
You may have up to three basic choices if you decide to buy into an HSA: 1) an interest bearing account, 2) a Money Market Account, or 3) a Mutual funds account.
No. Unlike 401(K)s and IRAs, there are no mandatory distribution requirements for an HSA.
The IRS allows a one-time transfer of IRA funds to an HSA. The amount of the IRA rollover cannot exceed your annual HSA contribution limit based on if you have individual or family HDHP coverage when combined with the HSA contributions you made for that year.
IRS regulations do require that you maintain eligibility for HSA contributions for a period of 13 consecutive months beginning with the month of the IRA transfer. If you do become ineligible for HSA contributions for any reason other than death or disability that would result in income tax and a 10% additional tax on the transferred amount.
The HSA custodian or trustee is required to report the total contributions made to your HSA each year as well as the total amount of funds taken from the account each year. This information is reported on Form 5498 and Form 1099-SA respectively; both forms must be sent to you as the account holder and to the IRS.
Yes. The HSA is designed to cover expenses not paid by your health plan including deductibles, coinsurance and copayments as well as many expenses your health plan may not cover such as acupuncture, LASIK eye surgery and some over the counter medicines. While you can use money accumulated in an HSA at any time for eligible expenses, you can only set up and contribute to an HSA while covered under a qualified HDHP.
A deductible is the amount of dollars that you must pay for covered healthcare expenses before your health plan will provide coverage. A high deductible health plan (HDHP) is an insurance plan that has a higher than average deductible. These types of plans also have annual limits on how much you have to pay out-of-pocket in the form of deductible, copayments and coinsurance fees.
You must have a qualified HDHP if you want to open and contribute to an HSA. For 2016, the limits are at least a $1,300 individual deductible and a $2,600 family deductible. For 2017, the limits are at least a $1,300 individual deductible and a $2,600 family deductible.
The annual out-of-pocket maximum for 2016 cannot exceed $6,550 for individual coverage and $13,100 for family coverage. The annual out-of-pocket maximum for 2017 cannot exceed $6,550 for individual coverage and $13,100 for family coverage.
Once funds are deposited into the HSA, the account can be used to pay for qualified medical expenses tax-free, even if you no longer have HDHP coverage. The funds in your account roll over automatically each year and remain indefinitely until used. There is no time limit on using the funds. Once you discontinue coverage under an HDHP and/or get coverage under another health plan that disqualifies you from an HSA, you can no longer make contributions to your HSA, but since you own the HSA, you can continue to use it for future expenses.
Account Balance and Claims Status information is available several ways:
You will receive a payment card to access your HSA. You can also pay for eligible expenses with any other form of payment and request reimbursement from your online or mobile account. For more information on how to use your account, please click here.
You can use your HSA to pay for eligible expenses incurred any time after you opened your HSA. There is no time limit between when you incur the qualified expenses and when you withdraw the corresponding amount from your HSA. Some people, called HSA savers, pay for current expenses out of pocket so that they can invest their HSA money and grow the account for future use. You should always save your itemized receipts and other paperwork to verify eligible expenses for when you withdraw funds, whether it is now or at some point in the future.
HSAs are completely portable, which means you retain ownership of the funds after you leave the company. If your employer paid the administrative costs, you may be responsible for them after you terminate your employment. Otherwise, your services remain the same.
Yes. Funds can be used to cover qualified medical expenses for the account holder as well as the account holder’s spouse and dependents.
You can continue to use your account tax-free for out-of-pocket health expenses. When you enroll in Medicare, you can use your account to pay Medicare premiums, deductibles, co-pays, and coinsurance under any part of Medicare. If you have retiree health benefits through your former employer, you can also use your account to pay for your share of retiree medical insurance premiums. You cannot use your account to purchase a Medicare supplemental insurance or “Medigap” policy.
Once you turn age 65, you can also use your account to pay for things other than medical expenses. If used for other expenses, the amount withdrawn will be taxable as income but will not be subject to any other penalties. Individuals under age 65 who use their accounts for non-medical expenses must pay income tax and a 20% penalty on the amount withdrawn.
You’re not able to borrow against the funds in your HSA, but you can withdraw money from your HSA at any time for any purpose. If HSA funds are used for an ineligible expense (whether medical or non-medical), then you may have to pay income tax on the amount and, for individuals who are not disabled or over age 65, there is also a 20% tax penalty.
If you are 65 or older at the time of withdrawal, then you are free to withdraw money from your HSA for any purpose. You may have to pay the applicable income tax but there will be no additional tax penalty.
You have the right to designate a beneficiary or beneficiaries to receive your remaining HSA funds when you pass away. If you do not designate a beneficiary or beneficiaries and you are legally married at the time of your death, your spouse will become the owner of your HSA. If you are not married at the time of your death and do not designate a beneficiary, the HSA will become part of your taxable estate.
Yes, you can transfer any amount from a previous HSA into a new HSA. The amount you transfer does not impact your annual HSA contribution limit. To transfer funds, complete a transfer of assets form obtained from the HSA administrator on the receiving end of the funds.
From Wiley and ConnectYourCare comes this definitive eBook that will help you master key concepts and ask all the right questions about health savings accounts.Get the eBook
Our simple-to-use calculator will show you exactly how much investing in a health savings account today can help you financially in the future.Start calculating