Health Savings Account (HSA)
What is a Health Savings Account?
HSAs are designed for individuals who have high deductible health plans and account owners can use the money for a variety of health-related expenses including eyeglasses or contact lenses, non-prescription medications, therapy, medical equipment, diagnostic testing, etc.
Benefits of Health Savings Accounts
HSAs can help curb medical costs, reduce taxable income, and even plan for retirement income.
Triple Tax Advantage
In most states, contributions are not subject to state income taxes.
Any interest or other earnings on the money in the account is tax free.
Tax-free withdrawals Withdrawals from your HSA are not subject to federal (or in most cases, state) taxes if you use them for qualified medical expenses.
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Health Savings Accounts
Health Savings Accounts (or HSAs) have grown in popularity as way for consumers to save for healthcare costs. However, many people are still unfamiliar with how to use HSAs and the benefits associated with them.
Take this lesson to learn more about HSAs.
Health Savings Account FAQ’s
How does an HSA plan work?
An HSA works in conjunction with high deductible health insurance.
Your HSA dollars can be used to help pay the health insurance deductible and any qualified medical expenses, including those not covered by the health insurance, like dental and vision care.
Any funds you withdraw for non-qualified medical expenses will be taxed at your income tax rate, plus 10% tax penalty.
Once you meet your calendar-year deductible, the health insurance pays remaining covered expenses in accordance with the terms and conditions of your particular plan. Some plans pay 100% of covered expenses after the calendar-year deductible is met.
Who is eligible for an HSA?
● You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.
● You have no other health coverage except what is permitted under Other health coverage, later.
● You aren’t enrolled in Medicare.
● You can’t be claimed as a dependent on someone else’s tax return.
What is "other" health coverage?
● Liabilities incurred under workers’ compensation laws, tort liabilities, or liabilities related to ownership or use of property.
● A specific disease or illness.
● A fixed amount per day (or other period) of hospitalization.
You can also have coverage (whether provided through insurance or otherwise) for the following items.
● Dental care.
● Vision care.
● Long-term care.
● Telehealth and other remote care (for plan years beginning before 2022).
Are there HSA management fees?
What is a qualified medical expense?
However, some expenses do not qualify. A few examples are:
● Surgery for purely cosmetic reasons
● Health club dues
● Illegal operations or treatment
● Maternity clothes
● Toothpaste, toiletries, and cosmetics
HSA money cannot generally be used to pay your insurance premiums. See exceptions under “Can my HSA be used to pay premiums?”.
*See IRS Publications 502 (“Medical and Dental Expenses”) and 969 (“Health Savings Accounts and Other Tax-Favored Health Plans”) for more information.
Are there adjustments for inflation?
Can my HSA be used to pay premiums?
● Qualified long-term care insurance; or
● Health insurance while you are receiving federal or state unemployment compensation; or
● Continuation of coverage plans, like COBRA, required under any federal law; or
● Medicare premiums.
When can I start to use the funds in my HSA?
What about “catch up” contributions for those 55 and older?
Can I have an HSA and an IRA?
Yes, having an HSA in no way restricts your ability to have an IRA.
What are the tax deductible contribution limits?
Do HSA plans work with physician and provider networks?
Can my HSA be used for dependents not covered by the health insurance?
What about non-medical withdrawals?
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.
What are the tax benefits?
● Cash contributions to an HSA are 100% deductible from your federal gross income (within legal limits).
● Interest on savings accumulates tax deferred.
● Withdrawals from an HSA for “qualified medical expenses” are free from federal income tax.
What expenses are qualified for reimbursement from my HSA?
Is it true that individuals 65 or older can take out funds from their HSA plan for any reason without a penalty?
If an individual is age 65 or older, regardless of whether the individual has been enrolled in Medicare, there is no penalty to withdraw funds from the HSA. As always, normal income taxes will apply if the distribution is not used for unreimbursed medical expenses (expenses not covered by the medical plan).