Financial Resource Center

Saving & Investing


The Basics of Health Savings Accounts

by Dennis Zuehlke / January 22nd, 2019


As healthcare costs continue to rise, more and more Americans are turning to health savings accounts (HSAs) to pay for deductibles and other expenses not covered by their health plans. If you qualify, an HSA can provide you with a substantial tax savings and enable you to pay for current and future healthcare costs.  

What is a health savings account?

An HSA is a type of tax-advantaged savings account created exclusively for the purpose of paying the qualified medical expenses of the HSA owner, the HSA owner’s spouse, and dependents. All HSA contributions are tax-deductible, the earnings on the account are tax-deferred, and distributions are tax-free if used to pay for qualified medical expenses.

What are the eligibility requirements?

To be eligible to contribute to an HSA you must meet the following eligibility requirements:

  1. You must be covered under an HSA-compatible high deductible health plan (HDHP). This is a health plan that has a minimum annual deductible of $1,350 for 2018 and for 2019, and a maximum out-of-pocket expense limit ($6,650 for 2018 and $6,750 for 2019) for self-only coverage, and a minimum annual deductible ($2,700 for 2018 and for 2019), and a maximum out-of-pocket expense limit ($13,300 for 2018 and $13,500 for 2019) for family coverage.
     
  2. You must not be covered by any other health plan that is not an HDHP. This generally includes enrollment in a flexible spending arrangement (FSA) or health reimbursement arrangement (HRA), coverage under a spouse’s FSA or HRA, as well as coverage under a spouse’s health plan that is not an HDHP.
     
  3. You must not be enrolled in Medicare.
     
  4. You must not be eligible to be claimed as a dependent on another person’s tax return.

How much can be contributed to an HSA?

The HSA contribution limit is based on the type of HDHP coverage. For 2018, you can contribute up to $3,450 for self-only coverage ($3,500 for 2019) and up to $6,900 for family coverage ($7,000 for 2019). If you are age 55 or older, you may make additional HSA catch-up contributions of up to $1,000.  

What expenses can I pay from my HSA?

You can use the money in your HSA to pay for deductibles, copayments for medical care and prescription drugs, coinsurance, and bills not covered by insurance, including vision and dental care expenses. There is no time limit for withdrawing HSA assets, so you may use the money in your HSA to pay for healthcare expenses during retirement, such as Medicare Part D and Medicare Advantage premiums, and even a portion of the cost of long-term care premiums. You cannot use your HSA money, however, to pay for Medicare supplement premiums.

All withdrawals used to pay for qualified medical expenses are tax-free. Any amounts withdrawn and not used for qualified medical expenses are taxable and subject to an additional 20 percent penalty tax (unless the withdrawal was made after the HSA owner died, became disabled, or reached age 65).

What are some of the advantages of an HSA?

An HSA has many advantages over other tax-advantaged savings plans. HSA owners save money because the premiums for HSA-compatible HDHPs generally are much lower than premiums for other types of health plans. Plus, HSA owners have complete control over which expenses to pay from their HSAs. Also, the account is completely portable. HSA owners can take the account with them if changing employers or move their HSA assets to another financial organization, even if contributions were made by their employers.

But the real advantage of an HSA is the tax benefits. “HSAs provide a triple tax-advantage. All HSA contributions are tax-deductible, the earnings are tax-deferred, and all distributions are tax-free if used to pay for qualified medical expenses,” according to Dennis Zuehlke, Compliance Manager for Ascensus, which provides HSA administration services to financial organizations nationwide. “There is simply no other tax-advantaged savings product that offers the triple tax-advantage of HSAs,” Zuehlke added.

Where can I open an HSA?

The best place to start is your local credit union. Many credit unions—but not all—offer HSAs. And if your credit union does offer HSAs, you will benefit from the same local service that you receive on your other credit union accounts. The provider of your HDHP may also have a relationship with a financial organization to provide HSAs to those who are insured under the plan.

 

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