Offering a health savings account (HSA) to your employees is a great way to help them take control of their health benefits and prepare for retirement. If they are not familiar with HSAs, they may have some questions about how HSAs can benefit them and their families. The following are answers to 10 common questions about HSAs that employees may ask.
1. How does an HSA work?
An HSA is a special kind of savings account that results in significant tax savings. HSAs are available to individuals enrolled in HSA-qualified plans and can be used (tax-free) to pay for qualified medical expenses (QMEs) — including doctor visits, prescriptions, dental and more. Money put into an HSA is tax-deductible and the funds earn interest tax-free. You can also invest HSA funds in mutual funds to further increase potential tax-free earnings.
HSAs never expire and the funds carry over year after year and remain with an accountholder even after changing jobs or retiring. Once accountholders reach 65, HSAs behave much like a 401(k) with one added bonus: You never have to pay taxes on money used for qualified medical expenses. For non-qualified expenses after age 65, you just pay income taxes with no additional penalty. HSAs are a great strategy for retirement.
2. Who can have an HSA?
Due to the significant tax savings offered with an HSA, the IRS has strict rules about who can open and add funds (contributions) to an HSA. To contribute to an HSA, an individual must be enrolled in an HSA-qualified plan and have no other health coverage, such as Medicare, military health benefits or medical FSAs (including a spouse’s). They also cannot be claimed as a dependent on someone else’s tax return.
3. How does an HSA help me save on taxes?
HSAs provide tax savings in three ways: Contributions to their HSA are tax-free. The funds in the HSA earn interest and can be invested, and any earnings are also tax-free. Funds can also be used to pay for qualified medical expenses and the distribution is tax-free. Accountholders need to keep good records to ensure they can prove to the IRS, in case of an audit, that the HSA funds were used for qualified medical expenses.
4. How much can I contribute to my account?
Because of the significant tax advantages of HSAs, the IRS sets annual HSA contributions limits. Contributions can be made until the tax filing deadline (without extension) of the prior tax year. HSA eligibility rules apply.
For 2019, the following limits apply:
For 2020, the following limits apply:
Each year, individuals age 55 and older can contribute an extra $1,000
5. Can an HSA be used for dependents not covered under the health plan?
Yes, generally. HSAs can cover qualified expenses of the accountholder, his or her spouse, and tax dependents, regardless of spouse or dependent healthcare coverage. (Members should consult their tax adviser about their specific situation.)
6. Can I change my contribution amount?
Yes, HSA contributions can be adjusted at any time. As an employer, you may offer a payroll deduction option so employees can contribute on a pre-tax basis. Employees can still contribute directly to their account or adjust their payroll contribution as-needed.
7. What are qualified medical expenses?
Qualified medical expenses — including certain dental and vision expenses — are typically considered eligible if they cover the diagnosis, treatment or prevention of disease and/or the costs for treatments affecting any part or function of the body. For more information and a list of QME examples, visit healthequity.com/qme.
8. What happens to HSA funds if an accountholder dies?
HSAs act much like any other savings account and named beneficiaries can inherit the assets. If an accountholder dies, a named spouse beneficiary can assume ownership of the account and use it for qualified medical expenses as if it was their own HSA. If the beneficiary is not a spouse, the account is no longer treated as an HSA. The funds are passed to the designated beneficiary(ies) or becomes part of the accountholder’s estate and is subject to applicable taxes.
9. Can someone have a flexible spending account (FSA) and an HSA at the same time?
In most cases the answer is no. The only exception is if it is a limited-purpose FSA (LPFSA) that covers dental or vision expenses only. A dependent care FSA (DCRA) is also allowed because it doesn’t cover medical expenses.
10. Can a person have an HSA and a retirement plan?
Absolutely! Owning an HSA does not prevent accountholders from participating in other retirement savings vehicles, such as a 401(k) or an IRA.
Learn more about HSAs by visiting HealthEquity.com/HSAlearn.
*HSAs are never taxed at a federal income tax level when used appropriately for qualified medical expenses. Also, most states recognize HSA funds as tax-free with very few exceptions. Please consult a tax advisor regarding your state’s specific rules.
**Investments available to HSA holders are subject to risk, including the possible loss of the principal invested and are not FDIC insured or guaranteed by HealthEquity, Inc..
It is the member’s responsibility to ensure eligibility requirements as well as if they are eligible for the plan and expenses submitted. One should consult a tax advisor as individual factors and situations vary.
HealthEquity does not provide legal, tax, financial or medical advice.