What is an HSA?
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.
Health Savings Account Basics
- Funding. You and your employer may contribute to your HSA on a pre-determined schedule throughout the year.
- Accessing Funds. When you have an eligible health care expense, pay for them with your payment card, or pay out-of-pocket and request reimbursement online or using the mobile app. Remember to always keep your receipts. Even if they are not needed for substantiation, you may need them for an IRS audit.
- Requesting Reimbursement. When you don’t use your payment card, it is quick and easy to submit requests for reimbursements and upload receipts online or using the mobile app.
- Reimbursement Processing. We will promptly process your request and reimburse you either by check or direct deposit if you sign up for that feature. Please note that you will receive your money sooner if you use direct deposit.
- Account Management. Log on to your online or mobile account regularly to check your account balance, review claims activity, and access valuable tools.
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.
- Tax Savings – An HSA provides you with triple tax savings:
- Tax deductions when you contribute to your account and/or tax free income when your employer contributes to your account;
- Tax free earnings through investments; and,
- Tax free withdrawals for qualified medical expenses.
- Affordability – A qualified High Deductible Health Plan – which is accompanied by an HSA — typically carries higher deductible, but lower monthly premiums. Savings from lower premiums can be put toward funding the HSA.
- Flexibility – You can use the funds in your account to pay for current medical expenses or save the money for future needs. Money saved can be invested and your account can grow through tax free investment earnings. You also have control over how much money to contribute to the account and which medical expenses to pay from the account.
- Ownership and Portability – HSAs are owned by you, not your employer. Additionally, accounts are completely portable meaning you can keep your HSA even if you change jobs, change your medical coverage or become unemployed.
HSA Eligible Expenses
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.
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.
- Some examples of items that are eligible are Insulin, bandages, contact lens solution, hearing aid batteries, and reading glasses. These items are eligible and do not require a prescription, letter of medical necessity or doctor’s directive.
- Some examples of items that are eligible with prescription are over-the-counter items that contain a drug or medication like cold and allergy medicine, pain relievers and sleep aids.
- Items that are eligible with letter of medical necessity or doctor’s directive include products such as fiber and weight loss supplements, vitamins and orthopedic shoes.
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.
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.
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.
Contributions and Investment Options
The IRS has increased HSA limits for 2019, as announced in May 2018. In 2019, the maximum contribution that can be made for employees with single coverage is $3,500, and the maximum contribution for employees with family coverage is $7,000.
In 2018, the maximum contribution for employees with single coverage was $3,450, and the maximum contribution for employees with family coverage was $6,900.
For both 2019 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.
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 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.
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).
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.
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.
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.
Health Insurance Coverage
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. In 2018, in order for an HDHP to be HSA-qualified, it must have at least a $1,350 individual deductible and a $2,700 family deductible.
The annual out-of-pocket maximum cannot exceed $6,650 for individual coverage and $13,300 for family coverage.
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.
Using Your Health Savings Account
- Use the mobile app, CYC mobile, or log on to your online account at any time for balance information. Your mobile and online accounts are secure and updated in real time.
- Call the Customer Service line at any time for automated balance information.
- Customer Service representatives are available to assist you via phone or email during extended business hours.
For more information on how to use your account, please click here.
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.
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.
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.
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.
To transfer funds, complete a transfer of assets form obtained from the HSA administrator on the receiving end of the funds.