Health Savings Accounts, or HSAs, are tax-advantaged accounts for people under high-deductible health plans (HDHPs) so they can save money for qualified medical expenses and reduce their taxable income. To qualify for an HSA, you need to fulfill the eligibility requirements established by the Internal Revenue Service in that you need to have a qualified HDHP, have no other health coverage, not be enrolled in Medicare and not be claimed as a dependent on someone else’s tax return.
You can only contribute to an HSA with cash; the yearly limit for deposits for 2020 is $3,550 for self-only HDHP coverage and $7,100 for family HDHP coverage. Amounts are adjusted every year for inflation, and the contribution limit is increased by $1,000 for individuals age 55 or older at the end of their tax year. An HSA owned by an employee can be funded by both the employee and the employer, and any other person, including family members and those who are self-employed or unemployed, can also contribute to an HSA. Contributions made by an employer to an HSA are included in the contribution limits listed above.
Contributions made to an HSA do not have to be used or withdrawn during the tax year, and any leftover contributions can be rolled over to the next year. Additionally, if an employee changes jobs, they can still keep their HSA. An HSA can also be transferred to a surviving spouse tax-free in the event of an account holder’s death. However, HSAs have specific rules regarding withdrawals, along with a recordkeeping requirement that may be burdensome to keep up.
Withdrawals will not be taxes as long as they are used to pay for qualified medical expenses not covered under the HDHP. Qualified medical expenses include deductibles, dental services, vision care, prescription drugs, co-pays, psychiatric treatments and other qualified medical expenses not covered by a health insurance plan.
Insurance premiums usually don’t count toward qualified medical expenses unless the premiums are for Medicare or other healthcare coverage for those who are age 65 or older, for healthcare insurance while you are unemployed and receiving unemployment benefits, and for long-term care insurance.
However, if you break the rules regarding withdrawals and use the money toward anything other than medical expenses, the amount withdrawn will be subject to income tax and an additional 20% tax penalty. If you’re age 65 or older, you will no longer be able to contribute to an HSA, though you will still be able to withdraw funds from the account for any expense without having to face the 20% penalty. In this case, income tax will still apply to non-medical usage.
Pros and cons of an HSA account
There are many advantages and disadvantages of an HSA. Here are some of the advantages:
Here are some of the disadvantages of an HSA:
An HSA account is like a personal savings account for people with high-deductible health plans to use toward qualified medical expenses. Anyone can contribute money to your HSA, and the money carries over between tax years, jobs, health insurance plans, etc. The main advantages of an HSA is that it allows those with HDHPs to save money for qualified medical expenses while also reducing their taxable income. However, HSAs require you to have an HDHP, which can be a financial burden because the deductibles for costly medical procedures can be very expensive. When deciding whether you should get an HSA, you should take into account all factors and your situation. For example, if you already have an HDHP, it may be a good idea to get one, but if you don’t already qualify, you may want to think again about whether it is worth getting an HDHP so you can have an HSA.