What is a Health Savings Account (HSA)?

A health savings account (HSA) combines high deductible health insurance with a tax-favored savings account. Money in the savings account can help pay the deductible. Once the deductible is met, the insurance starts paying. Money left in the savings account earns interest and is yours to keep.

Health Savings Account Advantages:

  • Tax-deductible
    Contributions to the HSA are 100% deductible (up to the legal limit) — just like an IRA.
  • Tax-free
    Withdrawals to pay qualified medical expenses, including dental and vision, are never taxed.
  • Tax-deferred
    Interest earnings accumulate tax-deferred, and if used to pay qualified medical expenses, are tax-free.
  • HSA money is yours to keep
    Unlike a flexible spending account (FSA), unused money in your HSA isn’t forfeited at the end of the year; it continues to grow tax-deferred.

Why High Deductible Health Insurance? To get the benefits of an HSA, the law requires that the savings account be combined with high deductible health insurance. High deductible health insurance costs less than traditional $250 or $500 deductible coverage because the insurance company doesn’t have to process and pay claims for routine, low-dollar medical care.

How does an HSA work?

An HSA works in conjunction with high deductible health insurance.
Your HSA dollars can be used to help pay the health insurance deductible and qualified medical expenses, including those not covered by the health insurance, like dental and vision care.
Any funds you withdraw for non-qualified medical expenses will be taxed at your income-tax rate, plus 10% tax penalty in 2010 and 20% in 2011 if you're under 65.
Once you meet the calendar-year deductible, health insurance pays the remaining covered expenses in accordance with the terms and conditions of your particular plan. Some plans pay 100% of covered expenses after the calendar-year deductible is met.

What are the benefits of an HSA?

High Deductible Health Plan:

  • Costs less than more "traditional" copay plans.
  • Provides quality health insurance.
  • One calendar-year deductible per family.

HSA Savings:

  • Used to meet your deductible.
  • Tax deductible off of gross income.
  • Grow tax-deferred.
  • NEVER taxed when used for qualified medical expenses.
  • Rolls over year after year -- no "use it or lose it".
  • Portable, goes with you wherever you go.

HSA Savings can also be used for:

  • Health insurance premiums when you're between jobs.
  • Qualified long-term care premiums.
  • Medicare premiums and out-of-pocket expenses
  • Living expenses after age 65 (pay ordinary income taxes).

What amount limitations for an HSA?

2014

Minimum
Deductible / Maximum
Out-of-Pocket / Contribution Limit / 55+ Contribution
Single / $1,250 / $6,350 / $3,300 / $1,000
Family / $2,500 / $12,700 / $6,550 / $1,000

Who is eligible to have an HSA?

You must be:
1) Covered by qualified high deductible health insurance plan;
2) Not covered under other health insurance;
3) Not enrolled in Medicare; and
4) Not another person's dependent.
Exceptions.
Other health insurance does not include coverage for the following: accidents, dental care, disability, long-term care, and vision care. Workers’ compensation, specified disease, and fixed indemnity coverage is permitted.

What are the tax deductible contribution limits?

Federal law states that annual contribution limits are $3,300 for singles/$6,550 for families for 2014. Individuals aged 55+ may contribute an additional $1,000 for each tax year.

Do HSAs work with physician and provider networks?

Yes. These networks are very often part of the health insurance plan, and they provide discounts on health care. The discounts apply to all care — even prior to meeting the health insurance deductible. So, your HSAs savings go further.

Can my HSA be used for dependents not covered by the health insurance?

Generally, yes. Qualified medical expenses include unreimbursed medical expenses of the accountholder, his or her spouse, or dependents.

Can my HSA be used to pay premiums?

No, this would be a nonmedical withdrawal, subject to taxes and penalty.

Exceptions.
No penalty or taxes will apply if the money is withdrawn to pay premiums for:
1) Qualified long-term care insurance; or
2) Health insurance while you are receiving federal or state unemployment compensation; or
3) Continuation of coverage plans, like COBRA, required under any federal law; or
4) Medicare premiums.

What are the tax benefits?

There are three major tax advantages to your HSA.
1) Cash contributions to an HSA are 100% deductible from your federal gross income (within legal limits).
2) Interest earnings accumulate tax-deferred.
3) Withdrawals from an HSA for “qualified medical expenses” are free from federal income tax.

What is a qualified medical expense?

A qualified medical expense is one for medical care as defined by Internal Revenue Code Section 213(d). The expenses must be primarily to alleviate or prevent a physical or mental defect or illness, including dental and vision. Most expenses for medical care will fall under IRC Section 213(d).
However, some expenses do not qualify.
A few examples are:

  • Surgery for purely cosmetic reasons
  • Health club dues
  • Illegal operations or treatment
  • Maternity clothes
  • Toothpaste, toiletries, and cosmetics
  • HSA money cannot generally be used to pay your insurance premiums.
    *See IRS Publications 502 (“Medical and Dental Expenses”) and 969 (“Health Savings Accounts and Other Tax-Favored Health Plans”) for more information.

Are lump-sum deposits permitted?

Under the law, yes, but make sure your financial institution accepts lump-sum deposits. You may also be required to continue minimum monthly deposits. Lump-sum deposits may not exceed the maximum annual contribution limit.

Are there adjustments for inflation?

Yes, the tax law requires an annual Cost of Living Adjustment (COLA) based on changes in the Consumer Price Index. This calculation, rounded to the nearest $50 increment, affects deductible limits, maximum out-of-pocket amounts, and the maximum annual HSA contribution limits.
Health insurance deductibles may change by the COLA each year.

Can I have an HSA and an IRA?

Yes, having an HSA in no way restricts your ability to have an IRA.

Can HSA money be rolled into an IRA?

No, it can only be rolled over into another qualified HSA without incurring tax consequences.

What happens to my HSA when I die?

Your HSA will be treated as your surviving spouse’s HSA, but only if your spouse is the named beneficiary. If there is no surviving spouse or your spouse is not the beneficiary, then the savings account will cease to be an HSA and will be included in the federal gross income of your estate or beneficiary.

When can I start to use the funds in my HSA?

Once your account is open, a deposit has been made to your account and funds are available, you can start using your HSA. You are 100 percent vested as soon as the funds are deposited and you have total control over the funds.

What expenses are qualified for reimbursement from my HSA?

You are eligible to receive tax-free reimbursement for qualified health expenses not covered by your insurance as defined by Section 213(d) of the Tax Code. A list of these expenses is available on the IRS Web Site, HSA distributions used for any purpose other than the qualified medical expenses listed will be taxable, and the appropriate tax rules will apply.