Health savings accounts offer triple tax benefits: contributions are tax-deductible, earnings on investment earnings are tax-free and withdrawals used for qualified medical expenses are free from federal income tax; insurance premiums do not qualify.
IRS offers an exception for individuals receiving federal or state unemployment benefits or COBRA coverage and who use HSA funds to cover their premiums.
Expenses That Are Eligible
Health Savings Accounts (HSAs) are an increasingly popular method for saving pre-tax money for future medical expenses that may not be covered by insurance, and even paying for high-deductible health plans (HDHP). When using an HSA to cover healthcare costs, several considerations must be kept in mind.
Government rules allow HSA funds to only be used for qualified medical expenses. This may include payments to doctors and dentists, prescriptions, imaging such as an MRI scan, medical equipment or supplies and hearing aids (typically). Psychological counseling sessions, dental implants, eyeglasses and physical therapy services may also qualify. In addition, most HSAs will cover virtual care visits when used instead of in-person care visits.
An HSA offers another advantage, in that you can invest your savings. This makes it a powerful tool for planning and saving for future healthcare costs; any interest or dividend payments received may even be claimed tax-free when withdrawing the funds for qualified medical expenses.
However, unlike flexible spending accounts (FSAs) or health care flexible spending arrangements (HCFSAs), any unused credits in an HSA carry over from year to year and can even be accessed when leaving an employer-sponsored plan or switching health plans; if however you switch to one which doesn’t qualify as HSA-eligible though, any accrued credits in your account will be forfeited.
Mistakenly, many individuals assume that any expense not directly related to medical care cannot be reimbursed from an HSA. Unfortunately, the IRS is increasingly strict regarding which purchases qualify as ineligible purchases and it’s essential to follow their guidelines to avoid paying a fine. Examples of items not eligible include vacations, vitamins, toiletries and over-the-counter medicines without a valid prescription as well as women’s sanitary products (pads/tampons) without doctor documentation are eligible for reimbursement from your HSA.
Other expenses eligible for an HSA account include COBRA premiums and long-term care insurance premiums, as well as health plan enrollment fees associated with new job or retirement enrollments. The rules surrounding claiming such expenses are easy to understand; however, you should consult a legal or financial advisor in order to assess if they apply to you personally.
Expenses That Are Not Eligible
Utilizing an HSA is a smart way to cut costs on health care by taking advantage of lower premiums, tax savings and money deposited directly into your account for use towards future deductible payments and out-of-pocket medical expenses. However, not all expenses qualify as eligible expenditures when paying with HSA funds. Eligible expenses are determined by the IRS and include various items related to medical, dental and vision care – Publication 502 provides a complete list. HSAs can be combined with other health benefits for additional savings opportunities. A qualified small employer health reimbursement arrangement (QSEHRA) enables you to set aside pre-tax dollars as reimbursements for eligible medical expenses not covered by your health plan.
HSAs can also help offset healthcare expenses when combined with a high-deductible health plan (HDHP) by serving as an emergency fund against unexpected healthcare expenses throughout the year. Although not suitable for everyone, HDHPs offer significant savings potential; their high deductible can make meeting annual medical costs challenging without sufficient savings set aside in an HSA account.
FSAs and HRAs offer you and your family members another means of meeting certain expenses without depleting personal savings accounts or incurring interest charges. They’re ideal for covering healthcare, dental and dependent care expenses not reimbursed by Medicare; easy to set up and use while offering tax savings from pre-tax dollars set aside for health expenses.
An HSA, FSA or HRA can coexist with Medicare Advantage and Supplemental health plans simultaneously. You may also combine an HSA with either Health Care Flexible Spending Accounts (HCFSAs) or Dependent Care Flexible Spending Accounts (DCFSAs). However, each plan year’s contributions cannot exceed IRS limits; any unspent funds from an HSA or FSA account at year end will be forfeited as unutilized funds in these accounts become forfeit.
Expenses That Can Be Withdrawn Tax-Free
HSAs, or Health Savings Accounts, are medical reimbursement accounts designed as investment vehicles that allow money withdrawn tax-free. When used alongside a high deductible health plan, this type of account can help cover expenses incurred prior to reaching their deductible; according to IRS definition, qualified expenses include prescription drugs and over-the-counter medicines as well as dental/vision care, copays/coinsurance/deductibles associated with healthcare plans as well as copays. Unlike FSA funds which expire annually; fees vary by plan type for using HSA accounts.
Step one to opening an HSA is enrolling in a high-deductible health plan (HDHP). Once enrolled, most HDHPs send out an information packet with forms to fill out and return. When returned, their HSA administrator notifies them and deposits premium pass-through payments into the account.
Consumers with HSA accounts can use the funds in their account to purchase all qualified expenses, from contact lenses and eyeglasses to over-the-counter allergy medicine and antacids to birth control pills, cough syrup and antibiotics – even over-the-counter gum and patches for smoking cessation are eligible expenses! Other qualifying expenses may also include hearing aids, dental and vision care as well as lead paint removal costs.
HSAs can help prepare for future healthcare costs in retirement when combined with an HDHP. Contributions are tax-deductible; earnings on investments are tax-free; and withdrawals at any age are tax-free.
Once consumers turn 65 years old, they can begin using their HSA to pay Medicare premiums and other related costs such as Medicare Advantage/Part D prescription drug policies or even supplementary insurance policies such as Medigap policies.
Expenses That Can Be Withdrawn Tax-Deferred
An HSA can be an ideal way for consumers with high-deductible health plans (HDHPs) to save for healthcare expenses, providing them with tax-free investment returns without incurring tax penalties at withdrawal time. Furthermore, unlike flexible spending accounts (FSAs), HSA funds don’t expire at the end of each year – any unutilized balances simply roll over!
An HSA can be opened with any bank, credit union, or brokerage that offers this type of account. Each HSA may have different terms and conditions but must all comply with IRS regulations; additionally all contributions made to an HSA are tax deductible* while any interest generated must be used toward qualified medical expenses before being taxed as income.
The IRS defines “qualified medical expenses” as any expense incurred for diagnosing, curing or treating disease or illness, such as prescription medications, hospital bills, doctor fees or copays. Individuals should keep receipts for all expenses they incur as any funds withdrawn from an HSA are subject to income taxes if not used towards qualifying medical expenses.
Consumers may be uncertain as to whether their HSAs can be used for Medicare premium payments. HSA funds can only be used to cover Part B and D premiums, deductibles and coinsurance amounts; HSA funds cannot be used towards Medigap premiums or Medicare Advantage premiums.
Consumers must also understand the rules surrounding Medicare Advantage and Medigap plans. Typically, these plans require individuals to enroll separately from traditional Medicare coverage; premiums associated with such plans do not qualify for reimbursement using HSA funds.
Individuals who possess Medicare Advantage or Medigap plans should keep receipts for premium payments made from an HSA as any funds withdrawn to cover these expenses will incur a 20% penalty, similar to what was implemented for Medicare Part D premiums not used towards qualified medical expenses. This rule has long been in place.
