What is a Health Savings Account?
A Health Savings Account (HSA) is a tax-favored savings account which allows funds to be accumulated tax-free to pay for current and future qualified medical expenses.
How It Works
Deposits into HSA
An HSA is designed to help individuals build tax-free savings for healthcare throughout your lifetime. An individual, an employer or anyone else can put money into an HSA. Money deposited into an HSA by an employer goes in tax-free, earns tax-free interest, and may be used for IRS approved tax-free expenses. Amounts deposited by individuals may be deducted at tax time.
Withdrawal from HSA
An individual can withdraw funds from their HSA to pay for IRS approved expenses. Withdrawals can be made by debit card usage and cash withdrawals from bank locations and ATMs.
Advantages of HSAs
Your high deductible insurance and HSA protect you against high or unexpected medical bills.
You could be able to lower your insurance premiums by switching to health coverage with a higher deductible.
You can use the funds in your account to pay for current medical expenses, including expenses insurance may not cover, or save money in your account for future needs, such as: insurance or medical expenses if unemployed, expenses after retirement (before Medicare), out-of-pocket expenses when covered by Medicare, and term care expenses and insurance.
Who Can Have An HSA?
Any adult can contribute to an HSA if they:
- Have coverage under an HSA-qualified "high deductible health plan" (HDHP)
- Have no other first-dollar medical coverage (other types of insurance like specific injury insurance or accident, disability, dental care, vision care, or long-term care are permitted).
- Are not enrolled in Medicare
- Cannot be claimed as a dependent on someone else's tax return
Contributions to your HSA can be made by you, your employer, or both.
Contributions to the account must stop once you are enrolled in Medicare. However, you can keep the money in your account and use it to pay for the expenses tax-free.
High Deductible Health Plan for:
- Major medical expenses
- Serious illness
- Major surgery
- Post deductible expenses
(After the deductible is met, the HDHP provides insurance against significant expenses.)
HSA Deferred Savings
(Excess HSA funds grow tax-free to protect against future expenses.)
Health Savings accounts for below deductible coverage:
- Doctors visits
- Minor medical expenses
(HSA contains funds day-to-day expenses and health expenses below the deductible.)
Ownership - Funds remain in the account from year to year, just like an IRA. There are no "use it or lose it" rules for HSAs.
Portability - Accounts are completely portable, meaning you can keep your HSA even if you:
- Change jobs
- Change medical coverage
- Become unemployed
- Move to another state
- Change your marital status
What are the benefits of an HDHP and HSA?
• Lower Insurance Premiums. Insurance premiums for high deductible plans are lower than premiums for more traditional forms of insurance because the deductible is higher.
• Alternative to Traditional Insurance. Traditional insurance (PPO, HMO, etc.) have proven too costly for many companies to offer.
• Tax Savings. HSAs allow individuals to get a tax savings for health insurance (or at least for the HSA). This is significant because historically and still today, individuals cannot deduct the cost of health insurance HSA law builds on:
- Medical Savings Account law and rules
- Individual Retirement Account law and rules
• Broader Healthcare Alternative. HSAs provide employees with an unlimited choice of medical providers because they are not as locked into a particular network. Additionally, HSA funds can be used to pay for employee wellness (obesity and smoking cessation), dental, vision and even alternative care providers such as chiropractors.
How Does HSA Work?
HSAs work in combination with an HDHP, also referred to as "catastrophic" insurance or major medical. The HSA pays for the day-to-day medical expenses while the HDHP pays for the medical expenses (above the deductible amount).
Control - You make all the decisions about:
- How much money to put into the account
- Whether to save the account for future expenses
- Which medical expenses to pay from the account
What happens to my HSA when I die?
If your spouse becomes the owner of the account, your spouse can use it as if it were their own HSA. If you are not married, the account will no longer be treated as an HSA upon your death. The account will pass to your beneficiary or become part of your estate (and be subject to any applicable taxes.)
Using Your HSA
You can use the money in the account to pay for any "qualified medical expense" permitted under the federal tax law. This includes most medical care and services, and dental and vision care.
You can generally not use the money to pay for medical insurance premiums, except under specific circumstances, including:
- Any health plan coverage while receiving federal or state unemployment benefits
- COBRA continuation coverage after leaving employment with a company that offers health insurance coverage
- Qualified long-term care insurance
- Medicare premium and out-of-pocket expenses, including deductibles, co-pays, and coinsurance, if you are age 65, for:
• Part A (hospital and inpatient services)
• Part B (physician and outpatient services)
• Part C (Medicare HMO and PPO plans)
• Part D (prescription drugs)
You can use the money in the account to pay for medical expenses for yourself, your spouse, or your dependent children. You can pay for expenses of your spouse and dependent children if they are not covered by your HDHP.
Any amounts used for purposes other than to pay for "qualified medical expenses" are taxable as income and subject to an additional 20% tax penalty. Examples include:
- Medical expenses that are not considered "qualified medical expenses" under federal tax law (e.g., cosmetic surgery)
- Other types of health insurance unless specifically described above
- Medical supplement insurance premiums
- Expenses that are not medical or health-related
After age 65, the 20% additional tax penalty no longer applies. If you become disabled and/or enroll in Medicare, the account can be used for other purposes without paying the additional penalty but has to be claimed as income.
What's a High Deductible Health Plan? (HDHP)
Individuals must be covered under an HDHP plan to qualify for an HSA. Generally, HDHPs require a minimum annual deductible and place a limit on the total out-of-pocket payments allowed.
Annual contribution limitation. For calendar year 2023, the annual limitation on deductions for an individual with self-only coverage under HDHP is $3,850. For calendar year 2023, the annual limitation on deductions for an individual with family coverage under HDHP is $7,750.
High deductible health plan. For calendar year 2023, a "HDHP" is defined as a health plan with an annual deductible that is no less than $1,500 for self-only coverage or $3,000 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $7,500 for self-only coverage or $15,000 for family coverage.
In general, the deductible must apply to all medical expenses (including prescriptions) covered by the plan. However, plans can pay for "preventative care" services on a first-dollar basis (with or without co-pay). Preventative care can include routine pre-natal and well-child care, child and adult immunizations, annual physicals, mammograms, pap smears, etc.
No Other Insurance Allowed - Except "Permitted" Insurance. Listed below are some of the big exceptions:
- Auto and life insurance
- Accident insurance
- Insurance for a specific disease or illness
- Insurance that pays for fixed amount per day for hospitalization