- A health savings account (HSA) is a unique investment account that offers pre-tax contributions, tax-free growth, and tax-free qualified withdrawals.
- Only those with a high deductible health plan are qualified to open an HSA.
- You can use an HSA for current or future medical expenses, a great benefit for those in or nearing retirement when medical costs tend to increase.
We can never fully predict the unexpected, but health insurance at least offers peace of mind. But, even with health insurance, trips to the doctor or hospital can be packed with major medical expenses. Fortunately, there’s an account to help your money go farther in health-related issues. Enter the health savings account.
What Is an HSA and Who Is Eligible?
An HSA is a savings account offered only to those on a high-deductible health plan. HSAs offer a rare set of triple tax benefits: You can deposit money pre-tax payments (contributions lower your taxable income), grow the account tax-free, and use the HSA funds income tax-free for qualified expenses. Also, unlike a flexible spending account (FSA), an HSA rolls over each year, so there’s no pressure to use the entire balance if you wish for your HSA to continue to grow.
The catch to opening an HSA is you must have a high deductible health plan and only use the account for eligible expenses. (A high deductible health plan can cause larger out-of-pocket costs when visiting the doctor but can also have lower monthly premiums.) The idea is these up-front costs for medical care are offset by your HSA, which again, will grow tax-free with pre-tax money. This does require a level of planning, as you need to estimate the cost of your annual medical expenses and determine how much you can afford to put in the account each paycheck.
HSA expenses must be eligible to avoid IRS penalties. Ineligible withdrawals result in a hefty fee of 20% on each withdrawal, as well as the normal income tax. However, if you’re 65 or older, you’ll only pay the income tax on the withdrawal, no matter why the funds were used.
There are also contribution limits, much like retirement accounts. With an HSA, the 2019 contribution limits are:
- Single-person coverage: $3,500
- Family Coverage: $7,000
If you’re 55 or older, you can contribute an additional $1,000 per year as a catch-up contribution.
It’s worth noting that you are eligible even if specific insurance plans don’t offer an HSA. As long as you’re on a high-deductible plan and aren’t on Medicare, you can open your own HSA through a separate provider. The HSA is owned by you, not your employer or insurance provider.
When to Open an HSA
If you plan to open an HSA, the end of the year is the perfect time to begin planning. Open enrollment typically runs from November 1 to December 15, and during this time, you can make new health insurance elections and change your plan. You can also opt for a high-deductible plan with an HSA when you start a new job or have qualified life changes in between enrollment periods.
A high deductible plan with an HSA isn’t for everyone, so be sure to read about high deductible health plans and whether it’s right for you. While they can be a great choice for people who can “self-insure” with a high deductible, others might require a different type of health insurance. When in doubt, speak with an insurance specialist or adviser.
HSA Eligible Expenses
The rules around HSA eligible expenses provide for many qualifying preventative healthcare and medical expenses. Keep the following types of expenses in mind when determining if you should go with a high deductible HSA plan. If you regularly incur any of these costs, this type of plan could be a great fit for your lifestyle. Also, take note of any receipts or medical documentation required by the IRS for some qualified medical expenses.
- General medical expenses: Any health care, physical exam, or dental treatment the IRS would count as a qualified deduction is generally covered by an HSA. The full, up-to-date list from the IRS is available here under Section 502.
- Hospital services: If you need to go to the hospital for medical treatment, it’s generally covered (check with your account advisor for specific details). Hospital services related to cosmetic surgery, including electrolysis or hair removal, aren’t covered.
- Childbirth: HSAs cover most of childbirth-related expenses including prenatal care, direct hospitalization, nursing supplies and more
- Chiropractor: Chiropractic services will be covered under HSA as a medical service.
- Prescription medication: Any kind of prescription drugs are typically covered as an HSA eligible expense. If the medication can be purchased over the counter, it isn’t covered unless it’s insulin or you have a current prescription for that over the counter medication.
- Breast pumps: Lactation devices or breast pumps can be purchased using an HSA with no required authorization from a doctor or physician. (Unfortunately, babysitting and diaper service for children are not covered by an HSA.)
- Artificial limbs: Any artificial limb or prosthesis is covered as medical equipment and HSA eligible.
- Long-term-care premiums: Any kind of long-term care can qualify for tax-free HSA payments. This also includes in-home nursing services and nursing home expenses.
- Cobra premiums: Insurance premiums for Cobra plans can qualify, but insurance premiums for your high deductible plan will not.
- X-rays: HSA will cover the fees associated with getting an x-ray as well as other body scans like MRIs or ultrasounds.
- Psychiatric care: Any psychiatric care, such as therapy, will be covered.
- Vasectomies: A sterilization procedure (such as a vasectomy) is covered by an HSA.
- Substance abuse treatment: In-patient expenses incurred during alcoholism treatment or drug addiction treatment can be covered. These expenses include lodging, food, and transportation costs. Smoking cessation programs and medication can also be covered as long as there’s a prescription for the medication.
- Artificial teeth: Dentures or other artificial teeth are generally covered by HSA, but procedures like teeth whitening are not.
- Physical therapy: Physical therapy will be covered as an HSA eligible expense.
- Mastectomy: Breast reduction, including a mastectomy, will be covered by HSA as a medical expense. Breast reconstruction surgery will also be covered as a medical necessity if it’s in relation to a cancer-based mastectomy.
- Birth control pills: Forms of birth control, including condoms or implants, will be covered.
- Fertility enhancement: Fertility treatments or enhancements, such as in vitro fertilization, shots, or even the reversal of a surgery, will be covered.
- Antacids: Any kind of antacid, including a proton-pump inhibitor, will be covered as long as it’s prescribed and not purchased over the counter.
Keeping Your HSA Healthy
With a high deductible plan, your health and well-being can ride on the health of your HSA. To keep your HSA healthy, there are several best practices you should put in place.
Continually Fund Your HSA
Fund your HSA as long as you’re qualified because contributing to your healthcare savings for you and your family is an important part of your budget. Any amount going into your HSA is better than nothing, so if you’re tightening your finances, it’s best to decrease your contributions rather than cease them. If your financial situation changes, consider upping the amount you put into your HSA, as it is a great safety net that will only grow over time. Medical care expenses can be unexpected, so having as much in your HSA as possible is ideal.
Ensure You’re Investing in the Right Places
Your HSA is an investment account, and like any investment account, your investment can be spread across a number of channels with varying levels of growth. Generally, you have a choice of mutual funds, ETFs, stocks, and bonds. Before speaking with a financial advisor about where your funds will yield the best growth, make sure you have your own health-spending goals in mind. Do you foresee any lengthy health-related expenses in the near future, or are you and your family generally healthy? Do you plan on using your HSA when you’ve retired or much older and may likely face higher healthcare costs?
Save All Your Spending Records
There’s always a chance the IRS will audit you, so make sure you keep all receipts and other spending records for all medical costs covered by your HSA. No amount is too small, so again — keep every receipt for at least three years in case of an audit. Your HSA provider will likely provide statements with each withdrawal for your healthcare expenses, so you can file those instead as proof of qualified expenses.
Make Your HSA a Habit
An HSA is a part of any good savings habit. Make investing in and monitoring your HSA as part of your financial health routine. It’s not only there to help you with immediate medical needs — it’s part of your retirement plan and security net.
Current and Continued Protection with HSA
HSAs are a lot like seat belts. You may not need one all the time, but if and when you do, you’ll be glad it’s there. If you have an HSA, make sure you’re always contributing to it and building it into a part of your savings routine. Over time, monitoring how your HSA is invested and using it when needed while keeping detailed records will become second nature. Ultimately, you’ll be glad it’s there.
Unlike a retirement account, your HSA can offer immediate relief, both in the form of its tax benefits and the medical expenses it can help you pay. You and your loved ones deserve to feel safe, and an HSA can do just that.