Health Savings Account

A health savings account, or HSA, is a tax-free savings account that belongs to you. You can use your HSA to pay for your insurance deductible and qualified out-of-pocket medical expenses. Your HSA works with your lower-premium higher-deductible medical plan to cover your major medical expenses.

Think of HSA accounts as a medical 401(k)--only better! HSA contributions can be made pre-tax, grow and accumulate value tax-free, and if used for qualifying medical expenses can be distributed or withdrawn tax-free. And all of the funds deposited into your HSA account are 100% vested and yours to keep even if you change employers or if you change health plans and can no longer contribute to your HSA. The money in your HSA account is yours to keep until you spend it.

An HSA puts more money into your pocket:

  • With an HSA, you get to take some of the money that would have gone to pay for higher health insurance premiums and put it into your own pocket.
  • You can use the HSA to pay for qualified medical expenses, or you can save it and let it grow with tax-free interest from year to year.
  • You don’t lose it if you don’t spend it (like the money you put in an FSA).
  • You don’t have to pay taxes on withdrawals for eligible medical expenses (like a 401[k]).
  • Even if you lose your qualified lower-premium plan, you can still use the funds remaining in your HSA on qualified medical expenses.
  • The HSA, including all the money you and your employer contribute, is yours. You take the account with you when you change jobs, retire, or leave your qualified health plan.

To be eligible to open an HSA, you must meet these requirements:

  • Be covered under an HSA-qualified health plan on the first day of any month for which eligibility is claimed (as described in IRS Publication 969 — Health Savings Accounts and Other Tax-Favored Health Plans).
  • Not be enrolled in Medicare.
  • Not be claimed as a dependent on someone else’s tax return.
  • Have no other insurance except what’s permitted by the IRS (see IRS Publication 969).
  • You and your employer can make pre-tax contributions to your HSA.
  • Your HSA can grow tax-free for as long as you own the account.
  • You can keep your money liquid in an FDIC-insured bank account or, when the balance grows high enough, invest it in mutual funds. It’s your choice.
  • You can contribute money up to the IRS yearly limit at any time during the year—as long as you’re covered by an HSA-qualified health plan and aren’t on Medicare or covered by other insurance. Even family members can contribute to your account (but only you and your employer can deduct your contributions from your taxes).
  • If you’re no longer employed, you can still make contributions to your HSA—as long as you’re still covered by your HSA-qualified health plan and aren’t on Medicare or covered by other insurance.
  • You don’t have to be of retirement age to make tax-free withdrawals at any time without tax or penalty—as long as you use the funds for qualified medical expenses.**
  • Any third party can make contributions to your HSA—even non-family members—on behalf of another person who qualifies as an eligible HSA holder. However, the contributor, in that case, doesn’t receive any tax benefits. (Only account holders and their employers can deduct any HSA contributions they make from their taxes.)
  • You Can Roll Over Funds From Other Tax-Advantaged Accounts. Transfers from other HSAs or Archer MSAs into an HSA are permitted as long as you’re the owner of both accounts. You can do a once per lifetime transfer from an IRA to your HSA. This transfer is limited to the annual HSA contribution limit set by the IRS. You must remain in your HSA-qualified health plan for the entire period following the month in which the transfer was completed in order to avoid taxes and penalties.

**There is a 20% penalty for withdrawals other than for medical expenses before the age of 65.

More than 70 percent of insured people incur less than $1,000 a year in medical expenses (including what both the patient and the health plan pay). If you take advantage of those preventive care services and adopt healthy lifestyle habits, it’s likely you won’t have to spend much of your HSA. The unspent portion of your HSA can grow tax-free from year to year.

You and/or your employer can make pre-tax contributions to your HSA up to the yearly IRS limits. In 2015, the maximum for individuals is $3,350. The maximum contribution limit for family coverage is $6,650 in 2015. People aged 55 and over can make an additional “catch-up” contribution of $1,000 per year.

Spouse/Domestic Partner and Dependents

In addition to your own medical expenses, you can use your HSA to pay the medical expenses of any family member who is reported as a dependent on your tax return, even if they’re not covered by your health plan. (However, their expenses won’t be applied toward your health plan’s deductible if they’re not on your plan.) The law states that money in an HSA can only be used for yourself, your spouse, and your tax dependents. If your domestic partner meets the IRS qualifications to be considered a tax dependent, you can legally use your HSA funds for his/her medical expenses.

You can use HSA funds to pay for qualified medical expenses as defined by the IRS. Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They don’t include expenses that are merely beneficial to general health, such as vitamins or a vacation.

Here Are a Few Examples of Qualified Medical Expenses:
  • Acupuncture
  • Crutches
  • Oxygen
  • Alcoholism
  • Dental treatment
  • Stop-smoking programs
  • Eyeglasses / eye surgery
  • Surgery
  • Ambulance
  • Hearing aids
  • Telephone equipment and repair for hearing-impaired
  • Annual physical examination
  • Home care
  • Therapy
  • Artificial limbs/teeth
  • Long-term care expenses
  • Transplants
  • Birth control pills
  • Medicines
  • Body scan
  • Prescribed Weight-loss program
  • Breast reconstruction
  • Nursing home
  • Nursing services
  • Wheelchair
  • Chiropractor
  • Optometrist
  • Wig
  • Contact lenses
Here Are Some of the Expenses That Are Not Qualified by the IRS:
  • Babysitting & child care
  • Future medical care
  • Nonprescription drugs
  • Hair transplant
  • Nutritional supplements
  • Dancing lessons
  • Health club dues
  • Diaper service
  • Insurance premiums
  • Elective cosmetic surgery
  • Electrolysis or hair removal
  • Teeth whitening
  • Medicines and drugs from other countries
  • Funeral expenses

A complete list is found in IRS Publication 502—Medical and Dental Expenses.

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