What is a Health Savings Account (HSA)?
A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers in the United States who are enrolled in a high-deductible health plan (HDHP). HSAs were created by the Medicare Prescription Drug, Improvement, and Modernization Act in 2003, and they were created to help average, every-day employees use pre-tax income to help pay for medical expenses not covered by their insurance companies.
How does an HSA work?
An HSA works in conjunction with an HDHP to help individuals and families save money on healthcare costs. Contributions to an HSA are tax-deductible, and the money in the account can be used to pay for qualifying medical expenses tax-free. This can include things like doctor's visits, prescription medications, and even dental and vision car
Who is eligible for an HSA?
To be eligible for an HSA, you must meet the following requirements:
You must be enrolled in an HDHP
You cannot be enrolled in any other type of health insurance plan (with some exceptions, such as a flexible spending account or a health care flexible spending arrangement)
You cannot be enrolled in Medicare
You cannot be claimed as a dependent on someone else's tax return
How much can I contribute to an HSA?
The annual contribution limit for an HSA is determined by the IRS and is subject to change each year. For 2023, the contribution limit for individuals is $3,850, and the contribution limit for families is $7,750. If you are 55 or older, you may also be eligible to make catch-up contributions of up to an additional $1,000 per year.
How do I open an HSA?
To open an HSA, you will need to enroll in an HDHP through your employer or through a private insurance company. Your HDHP should offer the option to open an HSA account as part of the enrollment process. If you are self-employed or do not have access to an HDHP through your employer, you can also open an HSA through a private bank or financial institution.
How do I contribute to my HSA?
There are several ways to contribute to your HSA:
Through payroll deductions: If you are enrolled in an HSA through your employer, you may be able to have contributions automatically deducted from your paycheck and deposited into your HSA.
By making contributions online: Many HSA providers offer online portals where you can make contributions to your account using a debit card or electronic funds transfer.
By mailing in a contribution: You can also make contributions to your HSA by mailing a check or money order to your HSA provider.
Can I use my HSA to pay for healthcare expenses right away?
Yes, you can use the money in your HSA to pay for qualifying healthcare expenses at any time. However, it's important to note that you can only use your HSA for tax-free withdrawals if you have receipts for qualifying medical expenses. If you use your HSA for non-medical expenses, you will be subject to income tax and a 20% penalty on the withdrawal.
What are qualifying medical expenses for an HSA?
Qualifying medical expenses for an HSA include a wide range of healthcare-related expenses, including:
Doctor's visits
Prescription medications
Dental and vision care
Mental health treatment
Chiropractic care
Long-term care insurance premiums
Can I use my HSA to pay for healthcare expenses for my family?
Yes, you can use your HSA to pay for qualifying healthcare expenses for yourself, your spouse, and your dependents. This includes expenses for children, regardless of whether or not they are claimed as dependents on your tax return.
Can I invest the money in my HSA?
Yes, many HSA providers offer the option to invest the money in your account in a variety of investment options, such as mutual funds or exchange-traded funds (ETFs). It's important to note that any investment earnings in your HSA are tax-free as long as they are used for qualifying medical expenses.
What happens to the money in my HSA if I switch to a different health insurance plan?
If you switch to a health insurance plan that is not an HDHP, you will no longer be eligible to contribute to your HSA. However, you can continue to use the money in your HSA to pay for qualifying medical expenses tax-free. If you switch to a non-HDHP and have not yet reached age 65, you will be subject to a 20% penalty on any non-medical withdrawals from your HSA.
Can I withdraw money from my HSA after age 65?
Yes, you can continue to use the money in your HSA to pay for qualifying medical expenses tax-free after age 65. If you use the money for non-medical expenses, you will still be subject to income tax, but the 20% penalty will no longer apply.
How do I keep track of my HSA contributions and withdrawals?
It's important to keep track of your HSA contributions and withdrawals to ensure that you are not exceeding the annual contribution limits and to have documentation of your qualifying medical expenses in case you are audited by the IRS. Many HSA providers offer online portals where you can view your account activity and download statements for your records. It's a good idea to keep copies of all receipts for qualifying medical expenses in case you need to provide proof of purchase to the IRS.
Are there any fees associated with an HSA?
Yes, some HSA providers charge fees for their services, such as monthly maintenance fees or transaction fees. It's important to carefully review the fee schedule before opening an HSA to ensure that you are comfortable with the fees associated with the account.
Should I open an HSA?
Whether or not an HSA is right for you will depend on your individual circumstances and healthcare needs. Some of the factors to consider when deciding whether to open an HSA include:
Your current and projected healthcare expenses: If you have high healthcare expenses, an HSA can be a good way to save money on taxes and reduce your out-of-pocket costs.
Your income and tax bracket: The tax advantages of an HSA are more valuable for those in higher tax brackets.
Your ability to contribute to the account: If you have the financial means to contribute to an HSA, it can be a good way to save for future healthcare expenses.
It's always a good idea to consult with a financial advisor or tax professional before making any decisions about your healthcare coverage and savings plans.
Conclusion
A Health Savings Account (HSA) is a tax-advantaged medical savings account that can help individuals and families save money on healthcare costs. To be eligible for an HSA, you must be enrolled in an HDHP and cannot be enrolled in any other type of health insurance plan or Medicare program. To see if you qualify for an HSA, speak to a certified financial professional, or your employer's human resources department!
