What You Should Know About Your Health Savings Account
A health savings account, or HSA, is a dedicated medical fund used to pay health care expenses that an insurance policy does not cover. There are eligibility requirements to meet in order to set up an HSA. It is important to monitor deposits and withdrawals and adhere to IRS regulations. Keep all medical receipts in case of an IRS audit, and fill out IRS Form 8889, turning it in with tax forms at the end of the year.
Applicants are required to have a high deductible insurance policy. This type of insurance acts as a catastrophic health insurance policy in the event of a costly health occurrence. Catastrophic insurance does not normally pay for prescriptions, physician visits or smaller health care expenses. The purpose of the high deductible insurance is protection against financial ruin if a serious health problem should occur.
Consumers must be under the age of 65 with no access to low deductible or no deductible health insurance coverage. If any other type of insurance or medical care is available, consumers are not eligible for a HSA. Other coverage that will disqualify a consumer includes low-deductible private health insurance, low deductible group health insurance or Medicare. Any consumer considered a dependent on someone else’s taxes does not qualify for an HSA.
An account can be set up through a bank, an insurance company, credit union, employer or any other institution as long as the IRS has approved the institution to act as a trustee for health savings accounts. A major benefit of an HSA is that consumers are not required to withdraw funds by a specific date. In other words, consumers will not lose funds because they roll over from year to year if they are not used. It not only provides consumers with a self-supplied supplement for health care, but an investment fund as well.
Eligibility guidelines remain the same, but fees and interest rates vary from one source to another. Compare charges and interest before setting up an account to get the best available rates. Contributions to the account are pre-tax dollars or deducted from personal income taxes at the end of the year. This makes it possible to pay for health care expenses before taxation on the funds, and may lower the tax bracket of many individuals. As long as consumers make withdrawals for qualifying medical expenditures or leave it in the account, no taxes apply.
IRS regulations determine the amount of funds that account holders are able to deposit yearly. According to the IRS website, the current IRS cap is $3,100 for individuals and $6,250 for families. Anyone aged 55 or older may deposit an additional $1,000 each year. Consumers should monitor accounts closely. If for any reason, a consumer over-deposits and surpasses the IRS cap, the overage incurs a 6% excise tax penalty. The allowable deposits and accrued interest remain untaxed. Any funds spent from the account for anything other than qualifying health care becomes taxable as ordinary income and is charged an additional 10% penalty.
Account holders do not have to seek permission from the trustee to withdraw funds. It is the sole responsibility of the account holders to distribute funds properly or reimburse themselves for qualifying health expenses. Most medical expenses not covered by insurance qualify, including:
- Physician Visits
- Durable Medical Equipment
- Diabetic Supplies
- Alcohol and Drug Treatment
- Dental Care
- Vision Expenses
- Chiropractic Services
- Hearing Services
Consumers can obtain a complete list from the HSA trustee or IRS Publication 502. Consumers should obtain the list and consult with the trustee of their account if any questions exist about a qualifying expenditure. Over-the-counter medications, other than diabetic supplies with a doctor’s prescription, do not qualify.
Unlike some of the other health savings accounts, an HSA has no stipulations that require the consumer to use the funds. It may remain in the account indefinitely without penalty or forfeiture. Consumers can use HSA funds to invest in higher interest opportunities, increasing the return on their account. Money market or other cash investment strategies are preferable because they still give consumers quick Cash access for unexpected medical expenses.
Account holders are not required to use HSA funds to pay for medical costs. If consumers are able to pay health care expenses out of pocket, an HSA makes a good tax-free investment account. At the age of 65, there is no penalty for withdrawing funds for other purposes. However, the amount that is withdrawn is subject to income taxes.