An HSA or health savings account is a personal savings account that can be used only for qualified health-related expenses that aren't covered by your health insurance policy. The advantage of using an HSA rather than other funding is that money put into an HSA is not subject to U.S. federal income tax. HSAs have become very popular -- today, an estimated $51.4 billion is held in 23.4 million HSA accounts in the United States.
What Types of Expenses Qualify for HSAs?
Qualifying health-related expenses run the gamut from prescription medications to guide dogs for the visually impaired, to fertility treatments, to ordinary doctor's office visits. IRS publication 502 provides the complete list of qualifying expenses. Costs not available for HSA reimbursement include cosmetic surgery, funeral expenses, and non-prescription medications.
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Who Can Open an HSA?
HSAs are available to American taxpayers who have high-deductible health insurance policies. In addition, you can't receive Medicare assistance, hold an additional health insurance policy with a low deductible, or be a dependent on another person's tax return. There is a limit to how much an individual and a family can contribute to an HSA each year.
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Tax Advantages of an HSA
Contributions to an HSA are not subject to U.S. federal income tax, even when the individual withdraws funds for qualified medical expenses. Contributors can save on taxes when they deposit the money, when they use it for qualified expenses, and when they earn interest within the account.
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Where Can You Open an HSA?
People can open health savings accounts at a variety of financial institutions including most banks and many healthcare providers. Different providers offer different investment options. In addition, the minimum investment and withdrawal amounts can vary among providers. Most charge a monthly service fee, although this is often waived for larger accounts.
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How Do HSA Withdrawals Work?
HSA withdrawals are as easy as using your debit card for the account or withdrawing money at the bank. You are responsible for making sure you are using the money to reimburse yourself for qualified expenses, so you'll need to save your receipts. However, you don't have to show these receipts to make a withdrawal.
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What Happens if You Don't Use All of Your HSA Funds Each Year?
Unlike funds in a flexible spending account, funds in an HSA roll over from year to year and earn interest and dividends. If you haven't used all of your HSA funds by the time you reach age 65 and enroll in the Medicare program, you can withdraw the funds without a penalty. (However, you will still have to pay taxes on money withdrawn for things other than qualified medical expenses.)
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What Are the Penalties for Non-Qualified HSA Withdrawals?
Yes, there is a 20 percent penalty for taking funds out of your HSA for anything but qualified medical expenses. However, this withdrawal penalty is waived for account holders age 65 and older, whether or not they have registered for Medicare.
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What Happens to My HSA Funds When I turn 65?
You are no longer able to contribute to your HSA once you enroll in Medicare, something most people do at age 65. However, if you continue to work and delay enrolling in Medicare, you can still make contributions to the account. Funds in your HSA may be withdrawn for any reason once you reach age 65.
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Can I Use My HSA Funds for Other Family Members?
Yes, federal law allows you to use the funds in your HSA for qualified medical expenses incurred by your spouse or any dependent of your claim on your tax return. This is true whether you have a self-only or a family health savings account.
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Is There a Deadline for Reimbursement From My HSA?
Unlike other accounts such as flexible spending accounts (FSA) from your employer, there is no deadline on when you can reimburse yourself for qualified medical expenses from your health spending account. Simply save your receipts to ensure you can prove the expenses are qualified and withdraw the money from your account at any time.
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