Note: A previous blog post discussed answers to the top 10 HSA questions. We will continue to bring you answers to top HSA questions.
Health Savings accounts (HSAs) can be beneficial for employees as well as your company. Still, employees may have questions about these accounts (especially if you are offering it to them for the first time). The following are more answers to some common questions about HSAs:
1. What exactly is a qualified High-Deductible Health Plan?
Having a qualified High-Deductible Health Plan (HDHP) means that you will typically pay less each month in premiums, but more out-of-pocket for medical expenses until you reach your deductible. For 2018, the IRS defines a qualified HDHP as one that has a deductible of at least $1,350 for an individual and $2,700 for a family (though the actual deductible amount can be higher than that). The total annual out-of-pocket expenses cannot be more than $6,650 for an individual and $13,300 for a family.
There is also a requirement that there is no coverage until the deductible is satisfied (approved preventive services are an exception). In order to open or continue to contribute to a health savings account, you must have a qualified HDHP. Your insurance provider can confirm whether or not your plan is qualified, so you should check with them before funding an HSA.
2. How does an HSA affect my tax bill?
HSAs are triple-tax advantaged.1 This means that you can contribute to, grow (through interest and potentially through investment returns2) and spend from your HSA tax-free, if you use the funds for qualified medical expenses.
3. What's the difference between an HSA and a Flexible Savings Account (FSA)?
There are a number of differences between HSAs and FSAs, but a couple of those differences are significant. The first is that an FSA does not roll over each year. That means the funds in an FSA must be spent by December 31 or they are lost (some plans now allow a small carryover, but that is limited to a maximum of $500 annually). With an HSA, however, the funds do roll over each year without limit.
The second main difference is that an FSA is an employer-established plan, meaning if someone wants an FSA, they must get it through their employer. This also means that if the employee changes jobs, they may forfeit a portion or perhaps all of the funds in the account. On the other hand, employees own their HSA directly, so even if they change jobs, the HSA (and the balance saved) goes with them.
4. Can I use my HSA to pay for medical premiums?
Usually, no. The IRS has excluded premiums from the list of qualified medical expenses. There are two exceptions to this rule: 1. You can use your HSA to pay for COBRA premiums while you are collecting unemployement, if applicable. 2. You can use your HSA to cover Medicare premiums after age 65 (not for supplemental plans).
You can also use your HSA to cover long-term care insurance premiums in retirement, but make sure you consult a tax advisor because the IRS limits the portion that can be paid from your HSA. You can learn more about this on the IRS.gov website.
5. Am I allowed to put a large sum into my HSA or do I have to do it in installments? Also, if my employer matches my HSA contributions, can I contribute the maximum annual contribution limit and have my employer match that amount?
As long as the amount you put into your HSA does not exceed the annual contribution limit, you can put a large sum into your HSA or contribute with installments throughout the year. Employer matches to your HSA count toward the annual contribution limit, and often an employer will limit the matching contribution on a monthly basis. Make sure you understand how your employer handles matching contributions. The total amount you collectively contribute each year (including employer matches) cannot exceed the annual contribution limit.
By law, employers are required to allow HSA payroll contribution changes at least monthly.
6. Is it true that accountholders 65 and older can use HSA funds for expenses other than qualified medical expenses without a tax penalty?
Yes, after accountholders reach 65 years of age, an HSA functions much like a 401(k) and other retirement accounts. You can use HSA funds for non-qualified expenses, and you only have to pay income taxes on that amount. But qualified medical expenses will always remain tax-free. Using the funds for non-qualified expenses before the age of 65 will result in taxes on the amount and a 20 percent tax penalty.3 It is the accountholder’s responsibility to ensure that they are abiding by the rules set forth by the IRS when it comes to distributing their HSA funds.
7. I just joined Medicare. Can I still contribute to my HSA?
No, the IRS does not allow those on Medicare to contribute to an HSA. However, accountholders on Medicare can still use the funds they previously contributed to their HSA on qualified medical expenses, including Medicare premiums.
8. What does "Save now, cash in later" mean?
Suppose you wanted to save the money in your HSA and let it grow for a certain amount of time instead of spending the funds on qualified medical expenses. During that time, you can pay for medical expenses out-of-pocket (make sure to keep the receipts!). Once the desired time you wanted to save HSA funds has elapsed, you can reimburse yourself for the medical expenses you paid out-of-pocket with your HSA funds. Just be sure you still have the receipts and can prove to the IRS if you’re audited that you reimbursed yourself properly. There is no expiration date for reimbursing yourself.
9. What are the downsides to having an HSA?
One downside is that the IRS limits how much people can contribute to their HSAs each year. For 2018, the limits are $3,450 for individuals and $6,900 for families. For other “drawbacks of HSAs, read our blog post “The top 3 ‘worst’ things about HSAs.”
10. I have a 401(k) so why would I want to have an HSA as part of my retirement strategy?
A recent report from Healthview Services estimated that a healthy couple should expect to spend $266,000 on medical expenses during their retirement. Growing the funds in an HSA and also in a 401(k) together could allow you to take care of many, if not all, the expenses of retirement.
You can learn more about HSAs by visiting HealthEquity.com/HSAlearn.
Have any questions we missed? Let us know in the comments.
1. 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.
2. 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.
3. 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.
Nothing in this communication is intended as legal, tax, financial, or medical advice. Always consult a professional when making life-changing decisions.