Health Savings Account FAQs
What is a High Deductible Health Plan (HDHP)?
A Health Savings Account is a personal savings account, much like an IRA, that allows individuals to save and pay for qualified medical and retiree health expenses on a tax-free basis. HSAs are established for the benefit of an individual and are portable. Unused account balances can be carried over from year to year, continuing to grow tax free.
Do I have an HSA qualified health insurance plan?
The quickest way to find out if your health insurance plan is HSA qualified is to ask your health insurance company. If they say ‘yes,’ then you know your health plan qualifies you to open an HSA. If your employer provides your health insurance, ask your employer. If they do not know, they should ask the insurer on your behalf.
Who can contribute to an HSA?
Once the eligibility requirements are met, anyone can contribute to an HSA on an individual’s behalf (the individual, the employer, their family, etc.) as long as they do not exceed the total annual maximum.
Are HSA contributions tax deductible?
Contributions made by the employer are not included in the employee’s taxable income and are not deductible on their federal tax return. Contributions made by the employee (or their family members) can be claimed as a deduction on their federal tax return.
What is the maximum contribution when one eligible spouse is covered by a single HDHP and the other eligible spouse is covered by a family HDHP?
The contribution limit is the statutory maximum family limit. This can be divided between the spouses' plans per their agreement.
How does the maximum family contribution apply when both spouses have a separate family HDHP?
The maximum HSA contribution limit for a married couple where both spouses have family HDHP coverage is the maximum statutory limit. This rule applies regardless of whether each spouse's family coverage plan covers the other spouse. The contribution limit can be divided between the spouses' plans per their agreement.
How are catch-up contributions handled?
Individuals that are eligible to make a catch-up contribution must make the catch-up contribution into their own HSA account.
Example: A husband and wife are both over age 55 and eligible to make a catch-up contribution. They have family coverage under the same HDHP. Each spouse must deposit their catch-up contribution into their own HSA account.
What are qualified out-of-pocket medical expenses?
Any expense that the IRS allows you to deduct as a medical expense on Federal Income Tax Form 1040 and as defined under Section 213 of the IRS Code are qualified, including:
- Prescription drugs
- Over-the-counter drugs, in some cases. See IRS Publication 969 for full details
- Long-term care insurance
- Health insurance premiums during unemployment
- And other health-care related expenses not including premiums
What if I use my HSA funds for non-qualified medical expenses?
It is your responsibility to ensure that your HSA funds are spent for qualified medical expenses, as defined by the IRS. If you use funds for non-qualified medical expenses, you must report this in your annual income tax filing, and pay the related income taxes, plus a 20 percent tax penalty. After age 65, any funds used for non-qualified medical expenses must still be reported as income, but the 20 percent tax penalty does not apply.
Can I use the money in my HSA to pay for medical insurance premiums?
Generally, you cannot use HSA funds 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 premiums 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)
Do I need to save my itemized receipts?
Yes. They may be needed if the IRS requests documentation to verify that the funds in your HSA were used for qualified medical expenses.
What if total contributions exceed the limits?
If total contributions exceed the allowable contribution limit for the year, you will be subject to an excess contribution tax. It is your responsibility to remove excess contributions and any interest earned before filing your federal income taxes.
What happens to the HSA in the event of death?
Balances remaining in the account become the property of the beneficiary. If the surviving spouse is the listed beneficiary, the HSA becomes the property of the surviving spouse and is subject to income tax only to the extent that distributions are not used for qualified medical expenses. If the beneficiary is not the surviving spouse, the HSA ceases to be an HSA as of the date of death.
Advantages of HSAs
Security: Your high deductible insurance and HSA protect you against high or unexpected medical bills.
Affordability: You should be able to lower your health insurance premiums by switching to health insurance coverage with a higher deductible.
Flexibility: You can use the funds in your account to pay for current medical expenses, including expenses that your insurance may not cover, or save the money in your account for future needs, such as:
- Health insurance or medical expenses if unemployed
- Medical expenses after retirement – before Medicare
- Out-of-pocket expenses when covered by Medicare
- Long-term care expenses and insurance
Savings: You can save the money in your account for future medical expenses and grow your account through investment earnings.
Control: You make all the decisions about:
- How much money you put into the account
- Whether to save the account for future expenses or pay current medical expenses
- Which medical expenses to pay from the account
- Whether to invest any of the money in the account
- Which investments to make
Portability: Accounts are completely portable, meaning you can keep your HSA even if you:
- Change jobs
- Change your medical coverage
- Become unemployed
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.
Tax Savings: An HSA provides you triple tax savings:
- Tax deductions when you contribute to your account
- Tax-free earnings through investment: and
- Tax-free withdrawals for qualified medical expenses.