Health Savings Account (HSA)
A Health Savings Account (HSA) is a great way for you to put aside money for current or future medical expenses and reduce your taxable income.
You can contribute to your HSA pre-tax every pay period which reduces your total taxable income, saving you money. In some cases, employers will match a portion of your contributions, thereby building up your funds faster.
The HSA balance can be invested – any money your investments earn is tax-exempt as well.
HSAs don’t have a waiting period. That means you’re free to use the funds for medical expenses (also tax-exempt) when the time is right for you. HSAs are portable, so even if you leave your current employer, your HSA and the balance goes with you. It’s yours for life.
HSAs follow a three-step process: Plan, Contribute, and Spend.
HSA plans were created to give those covered by high-deductible health plans (HDHP) a tax-advantaged means to put money aside for qualified medical expenses.
Any money you contribute is not taxable, as long you stay within the annual contribution limit. The IRS has established limits on how much you can contribute annually to an HSA. Those limits depend on whether it is an individual or family HSA. These limits are managed by the IRS and can change annually.
While you are enrolled in a high-deductable health plan, you and your employer can make contributions to the account. As the accountholder, you are responsible for ensuring that your account does not exceed the IRS contribution limit annually.
Your HSA funds are yours to keep, regardless of who made the deposit. Generally, you can continue to make deposits as long as you are participating in a high-deductible health plan.
If you set up regular contributions with your employer, they will move funds from your paycheck to your HSA on a pre-tax basis. You may also be able to claim a tax deduction on other contributions you make to your HSA.
Keep in mind, if you are no longer enrolled in a high-deductible health plan, any money in your HSA will always be yours, but you will no longer be able to make further deposits. However, if you enroll in a high deductible health plan again, you can resume making contributions to your HSA.
When making withdrawals from your HSA, you don’t need the custodian’s approval in advance. Additionally, any withdrawals made for eligible medical expenses are not subject to taxation. Qualified expenses include items and services covered by your health plan, as well as dental and vision.
Methods for making withdrawals vary among different HSA types, but the most common way is by using a debit card. Your HSA custodian may supply you with a debit card which you can use at facilities including doctors’ offices, pharmacies, and merchants that offer eligible medical products or services.
You can earn interest on an HSA - that’s why HSAs are sometimes referred to as healthcare IRAs. If you achieve a certain predetermined minimum balance, your account custodian may allow you to invest those funds in financial assets, growing your account’s value over time. Any interest you accrue can be used for eligible medical expenses, tax-free. However, like any other investment, there is no guarantee you will earn additional funds.
* Investments are not FDIC Insured.
Qualified services and items covered by your health plan:
- Non-prescription, over-the-counter medications (with doctor’s prescription)
For details about eligible expenses, visit www.IRS.gov. In general, medical, dental, vision and prescription expenses are covered.
To be eligible to open HSA, you must meet several requirements:
- You must be enrolled in a qualified high-deductible health plan on the first day of the month
- You have no other health coverage
- You are not enrolled in Medicare
- No one can claim you as a dependent on their tax return
You can open an HSA at any point after enrolling in a high deductible health plan. After you open your HSA, you will receive a Welcome Kit. In it, you will find information about the many ways you can use your HSA to fulfill your individual needs. Some of these uses include:
- Investing for retirement or emergencies
- Paying for planned or sudden, unexpected expenses
- Reducing your taxable income
- Payroll deduction: Elect a payroll deduction amount during your employer’s open enrollment. However, not all employers offer this option.
- Individual contribution: Deposit money using electronic deposits from your personal checking or savings account, or if available, mail a check along with a deposit slip.
- Trustee-to-trustee transfer: Transfer funds from an HSA you already have with another financial institution.
You can use your account funds on any eligible expenses, as defined by the IRS.
How Do I Use My Debit Card?
Once you’re enrolled in your HSA, a debit card will be mailed to you. When you receive your debit card, call the number on the label affixed to the front of the card to activate it.
It works just like a credit or debit card and you may need to enter your PIN if you choose “debit” at the point of sale. Generally, this card cannot be used at ATMs or for “cash back.”
There are other ways to access HSA funds to pay for eligible medical expenses.
- Upload a reimbursement form to your HSA provider. There is no expiration date for reimbursements. It’s up to you to decide when to reimburse yourself.
- Use the Portal: When you receive a bill for an eligible medical expense, log into your account portal and follow the instructions for requesting a reimbursement. You can do so at any time – the portal is open 24/7.