- What is a Health Savings Account (HSA) Plan?
A Health Savings Account (HSA) Plan pairs a High Deductible Health Plan (HDHP) with an HSA. An HSA is a special tax-advantaged savings account that allows you to pay for current covered health care expenses and save for future qualified medical and retiree health care expenses on a tax-favored basis.
- What are the advantages of establishing an HSA?
There are many advantages to establishing and funding an HSA including:
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Contributions through payroll deposits are usually made with pre-tax dollars, meaning they are not subject to federal income taxes (or state income taxes in most states).
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Contributions to your HSA made with after-tax dollars can be deducted from your gross income, meaning you pay less income tax at the end of the year.
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Employers may make contributions to your account; these contributions are excluded from your gross income.
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Withdrawals from your HSA for qualified medical expenses are not subject to federal income tax (or state income taxes in most states), and neither is the interest you earn on your HSA balance.
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Unused HSA dollars roll over from year to year, accumulate over time and remain available for future qualified medical expenses, even if you change medical plans, change employers or retire.
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Contributions can come from multiple sources including yourself, your employer, family members, or anyone else may contribute to your HSA up to the maximum annual contribution limit.
Check with your financial advisor for more information about how these rules may apply to your personal tax situation.
- How are HSAs different from health care Flexible Spending Accounts (FSAs)?
Both HSAs and FSAs allow you to pay for qualified medical expenses with pre-tax dollars. One key difference, however, is that HSA balances can roll over from year to year, while FSA money left unspent at the end of the year or after a designated grace period is forfeited.
- What health care expenses can I pay for with an HSA?
Your HSA funds can be used tax-free to pay for qualified medical expenses. There are hundreds of qualified medical expenses, including some you might not expect:
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Prescribed medications
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Over-the-counter medications with a prescription
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Insulin/diabetic supplies
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Bandages
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Contact lens supplies
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Dental visits/orthodontics
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Eyeglasses
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Long-term care insurance premiums
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Cost of COBRA coverage
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Medical insurance premiums while receiving federal or state unemployment compensation
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Post age-65 premiums for coverage other than Medigap or Medicare supplemental plans
All of these expenses and more may be paid for with your HSA funds, free from federal taxes or state tax (for most states). Refer to IRS Publication 502 for a more complete list of qualified medical expenses.
- How do I know if I’m eligible for an HSA?
According to federal guidelines, you may open and contribute to an HSA if you:
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Are covered under a high-deductible health plan (HDHP) on the first day of the month
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Are not covered by any other non-HDHP plan (with certain exceptions for plans providing certain limited types of coverage, such as vision and dental)
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Are not currently enrolled in Medicare
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Are not claimed as a dependent on another person's tax return
For more eligibility information, please refer to the U.S. Treasury. If you are unsure as to your eligibility to contribute to an HSA, check with a qualified tax advisor for assistance.
- How much can I contribute to an HSA?
For 2012, the combined maximum contributions to your HSA, including any made by your employer, are:
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$3,100 if you have individual coverage
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$6,250 if you have family coverage
If you turn age 55 or older in 2012 or after, you can add up to $1000 more as a catch-up contribution. These amounts are valid as long as you are enrolled in qualified HDHP coverage for the entire tax year, or you enroll before the first day of December - meaning you have held at least one full month of HDHP coverage and then continue to maintain qualified HDHP coverage for the next 12 months (13 months total).
* Contribution limits are set by the IRS and are subject to change. Visit irs.gov for the most up-to-date information.
- Could I pay out-of-pocket covered expenses with after-tax dollars instead of using funds from my HSA
Yes. You always have the option to choose when and when not to use your HSA dollars toward qualified medical expenses. You may choose to pay for qualified medical expenses with after-tax dollars, allowing your HSA balance to grow tax-free. Many HSA participants elect to pay smaller expenses with after-tax dollars, allowing their balances to grow for larger medical expenses in the future.
- What would happen if I had an HSA and I left my job?
The HSA is portable. This means that you could take your HSA with you when you leave your job and continue to use the funds you have accumulated. Funds left in your account continue to grow tax-free. If you continue to be covered by a qualified HDHP, you can even continue to make tax-free contributions to your HSA.
Distributions from your HSA that are used exclusively to pay for qualified medical expenses for you, your spouse or dependents can be excluded from your gross income. Your HSA funds can be used for qualified medical expenses even if you are ineligible to make contributions to your HSA.
- What happens to the money in an HSA after age 65?
At age 65 and older, your funds continue to be available without federal or state tax (for most states) for qualified medical expenses. For example, you can use your HSA to pay certain insurance premiums, or your share of retiree medical coverage offered by a former employer. However, funds cannot be used tax-free to purchase Medigap or Medicare supplemental policies.
If you use your funds for qualified medical expenses, the distributions from your account remain tax-free. If you use the funds for non-qualified medical expenses, the distribution becomes taxable, but exempt from the tax penalty.
With enrollment in Medicare, you are no longer eligible to contribute to your HSA. If you reach age 65 or become disabled, you may still contribute to your HSA if you have not enrolled in Medicare.
- How are domestic partners treated in regard to HSAs?
The IRS does not consider a domestic partner a spouse, regardless of any state law exceptions. Unless your domestic partner qualifies as your dependent under the federal tax laws, you cannot withdraw funds tax-free to pay for your domestic partner's qualified medical expenses.
However, if you are enrolled in a family HDHP that covers your domestic partner and your domestic partner satisfies the other HSA eligibility rules, your domestic partner may be able to establish and contribute to their own HSA. Informally, the IRS has indicated that the combined contribution limit that applies to married couples should not be applied to domestic partners. This means that both you and your domestic partner may be able to make the maximum HSA contribution for family coverage to your separate HSAs. You should consult with your personal tax advisor to assess the application of these rules to your personal tax situation.
- If I have an HSA, does it limit which doctors or hospitals I can use?
No, the HSA part of the HSA Plan itself is a funding mechanism, not the health plan. So, using the HSA to pay those qualified medical expenses not covered by your health plan has no impact on the providers you choose. You should still follow your health plan's guidelines for receiving care.
