Paying for Healthcare: How to Utilize a Health Savings Account

September 8, 2014

Understanding the ins and outs of paying for healthcare coverage is a challenge, but a huge benefit for your budget.

We recently covered how a flexible savings account (FSA) can result in significant savings on medical and dependent care expenses (check it out here).  Another tool you can use to save on medical expenses is a Health Savings Account (HSA).

You have access to an HSA if you are enrolled in a High-Deductible Health Plan (HDHP).  You cannot contribute to an FSA and an HSA concurrently, unless it is a limited FSA that reimburses you only for qualified vision and dental expenses.  Remember the “no double-dipping” rule – you cannot claim expenses reimbursed under an HSA for reimbursement elsewhere or as a tax deduction.

What is HDHP coverage?

To enroll in an HSA, you must also be enrolled in an HDHP plan.  An HDHP plan must meet certain rules set by the IRS.  For example, for 2014, an HDHP plan must have a minimum $1,250 annual deductible for self-only coverage and a minimum $2,500 annual deductible for family coverage.  The HDHP maximum annual out-of-pocket amount for self-only coverage is $6,350 and the maximum annual out-of-pocket amount for family coverage is $12,700.

How does an HSA work?

While an HSA account must be administered by a trustee approved by the IRS (such as a bank or an insurer), you are the owner of your HSA account.  An HSA account cannot be jointly owned.  Your HSA account belongs to you when you terminate or change employment.  You can elect a beneficiary of the HSA account upon your death.  If you elect your spouse as the beneficiary, then upon your death, the HSA transfers to the spouse.  If you elect another person to be the beneficiary of your HSA account, then the account transfers to the beneficiary and becomes taxable to that beneficiary in the year of your death.

Am I eligible to enroll in an HSA and how can I do so?

To be eligible to enroll in an HSA you must be enrolled in an HDHP.  You must also not be enrolled in Medicare or be claimed as a dependent on another person’s tax return.   You also may not have other insurance coverage other than that covered by certain limited exceptions.

How much can you contribute?

The HSA contribution limits are adjusted on an annual basis by the IRS.  For 2014, if your HDHP coverage is only for yourself, you may contribute up to $3,300.  If you have family coverage under the HDHP, you may contribute up to $6,550.  Generally, if you are between ages 55-65 you can contribute an extra $1,000 beyond the applicable contribution limit.  You can find information on HDHP and HSA 2015 contribution limits here.

What are the advantages?

An HSA is a tax-advantaged vehicle which provides you with the opportunity to contribute pre-tax dollars toward qualified medical expenses.  An additional bonus is that the funds that you contribute stay in the HSA.  There is no forfeiture of unused funds at the end of the year like with an FSA.  Any unused funds in an HSA account are carried over into the next year.  You are not taxed on the funds in the HSA account nor on the gains so long as disbursements are made toward qualified medical expenses.

Whose medical expenses are covered?

You can generally request tax-free distributions from the HSA account for qualified medical expenses incurred by you, your spouse and your dependents.

What are qualified medical expenses?

Most medical expenses, such as for example, copays and co-insurance are considered qualified expenses.  Generally, prescription medicines are covered, as well as over-the-counter medicines with a prescription, and many medical supplies.  Insulin is also a qualified medical expense.  Insurance premiums are not considered qualified medical expenses, with a few exceptions such as COBRA payments, some Medicare premiums, and select others.  Detailed information regarding qualified medical expenses can be found in IRS Publication 502.

When can distributions be made from the HSA account?

You can incur qualified medical expenses and request distributions from the HSA at any time.  Even if you are no longer enrolled in the HDHP plan and can no longer contribute to the HSA, as long as funds remain in that account you can use the funds for reimbursement of qualified medical expenses.  However, if you use the HSA for reimbursement of non-qualified expenses, you will be subject to income tax and an additional 20% penalty on those funds.

After age 65, you can use funds in the HSA for expenditures other than qualified medical expenses and you will be subject to income tax on those funds, but you will not incur the 20% penalty.

For more information on HDHP coverage and HSA accounts, please refer to IRS Publication 969.

Do you use an HSA?  Have you found it to be useful in providing savings on medical expenses?

This post was written by Julie Borisov from Colorado PERA. Would you like to write a guest post for The Dime? Email us at dimecontact@copera.org.