HEALTH SAVINGS ACCOUNTS, EXPLAINED
What is a Health Savings Account?
Just as the name implies, a Health Savings Account or HSA, is a personal savings account paired with a High Deductible Health Plan designed to help you save money pay for medical, dental, vision and other qualified healthcare expenses now.
Who Can Open a Health Savings Account?
Not just anyone can open an HSA. You must be enrolled in a High Deductible Health Plan (HDHP)…. and not just any High Deductible Health Plan qualifies for an HSA. As defined by the Internal Revenue Service, the minimum deductible for an HSA-Qualified HDHP is $1,400 for single plan and $2,800 for family plans (both unchanged from 2020). The HDHP also cannot provide first dollar benefits (except for preventive care benefits manded by the Affordable Care Act) – meaning the plan may not offer co-pays before the deductible has been met. The IRS has confirmed that High Deductible Health Plans with Health Savings Accounts will not be jeopardized if the health plan provides a COVID-19 deductible waiver benefits, or with a deductible below the minimum $1,400 single / $2,800 family deductible for an HDHP.
HSA-Qualifying HDHPs also must have a maximum out-of-pocket limit of $7,000 for a single plan and $14,000 for family plans for 2021 (an increase from $6,900/$13,800 in 2020). Additionally, you cannot be covered by any health plan that is not a qualified High Deductible Health Plan, cannot be enrolled in Medicare, and cannot be claimed as a dependent on another individual’s tax return. You also cannot pair your Health Savings Account with a general use Flexible Spending Account (FSA) or Health Reimbursement Account (HRA). Other restrictions and exceptions also apply which can be found at www.irs.gov.
What are the Advantages of HSAs?
The Advantages of Health Savings Accounts that most people think of are the tax-free nature of the accounts. HSA Tax Advantages include:
- HSA Contributions are TAX-FREE
- Qualified Medical Expense Payments from your HSA are TAX-FREE
- Your HSA balance earns interest TAX-FREE
How Do Health Savings Account Work?
Your Health Savings Account essentially works as a bank account for monies to be spent on current and future medical expenses. HSA payment methods can include debit cards, online bill pay, or you can pay out-of-pocket and then distribute funds from your HSA to reimburse yourself. You may use an HSA to help pay for your health plan’s medical expenses as well as other qualified medical expenses such as dental, vision, and alternative medicines. Unused HSA funds can remain in your account for use in future years and can be invested in a choice of investment options, providing the opportunity for funds to grow.
Your Health Savings Account is owned by you and remains with you even after leaving a job. Your HSA will transfer to your new health plan as long as the plan remains an HSA-qualifying High Deductible Health Plan. Even if you select a non-qualifying health plan you can continue to use the funds left in your Health Savings Account, but you cannot contribute new funds into the account.
How Are Health Savings Accounts Funded?
HSAs are funded by contributions, held in your bank account. Contributions can be made by you or your employer if they offer any employer funded contribution program. The annual limit on HSA contributions, determined annually by the IRS, and will be $3,600 for single coverage and $7,200 for family coverage in 2021 (roughly a 1.5% increase from current).
What Qualifying Medical Expenses can HSA Funds Pay For?
HSA funds can be used tax-free to pay for out-of-pocket qualified medical expenses, even if the expenses are not covered by a HDHP. This includes expenses incurred by any member of your family (for those with family coverage).
There are hundreds of HSA-qualified tax-free medical expenses. The complete list can be found at www.irs.gov and searching for Publication 502 or 969. Examples of qualified expenses include:
- Alcohol & Drug Addiction Treatment
- Breast Reconstruction Surgery (mastectomy-related)
- Chiropractic Services
- Cosmetic Surgery (only if due to trauma or disease)
- Dental Treatment (X-rays, fillings, braces, extractions, etc.)
- Diagnostic Devices (such as blood sugar test kits for diabetics)
- Doctor’s Office Visits and Procedures
- Eyeglasses, Contact Lenses and Eye Exams
- Eye Surgery (such as LASIK surgery)
- Fertility Enhancements
- Hearing Aids
- Hospital Services
- Laboratory Fees
- Long-Term Care Medical Expenses & Premiums
- Menstrual Care Products
- Nursing Home
- Nursing Services
- Operations/Surgery (excluding unnecessary cosmetic surgery)
- Over-the-Counter Medications (not all OTC medications qualify)
- Physical therapy
- Prescription Medications
- Psychiatric Care
- Psychologist Counseling
- Speech Therapy
- Stop-Smoking Programs
- Weight-Loss Programs (must be to treat a specific disease diagnosed by a physician)
What happens if I use my HSA for a non-qualified expense?
If you pay for anything other than qualified expenses with your HSA, the amount will be taxable. If you are 64 or younger, you will also pay an additional 20 percent tax penalty. If you are 65 or older, the tax penalty does not apply, but the amount must be reported as taxable income.
Is a Health Savings Account Right For You?
We advise that you consult a tax or financial advisor to discuss your personal circumstances to determine how beneficial a Health Savings Account would be for your finances. You can also discuss with an experienced broker at Saunders Insurance Agency by calling 740-446-0404.
Follow SIA on Facebook, Instagram, and Twitter for COVID-19 and insurer updates. Stay safe and let us know if there’s anything we can do to help.
Visit www.irs.gov for the latest HSA guidelines.