As the cost of health insurance continues to go up year after year, consumers need to do everything possible to get the best coverage at the lowest possible price.
No matter if you get health insurance through work or on your own, there’s an often-overlooked way to save money on medical expenses called a Health Savings Account or HSA.
In this post I’ll explain how these special accounts work and who can have one. Plus, I’ll answer a listener question about what to do when you end up with more than one HSA.
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How Do Health Savings Accounts (HSAs) Work?
Health Savings Accounts were created in 2003 to help consumers manage rising medical costs. Money goes into the account before it’s taxed, grows tax-deferred, and can be used to pay for current or future medical expenses tax free.
Contributions you make that were previously taxed can be deducted from your taxable income when you file your income tax return, even if you don’t itemize deductions. That means you never pay tax on money that goes into your HSA, which is a nice savings.
Using an HSA to pay for qualified medical, dental, and vision expenses is like getting a 20% to 30% discount, depending on your tax rate. Not bad!
Plus, a little-known benefit is that you can also use an HSA to boost your retirement savings. That’s because after your 65th birthday, you can take distributions to spend any way you like—even on non-medical expenses.
Using an HSA to pay for qualified medical, dental, and vision expenses is like getting a 20% to 30% discount, depending on your tax rate. Not bad!
You contribute money to an HSA and then spend it on a wide range of qualified, unreimbursed medical expenses until your deductible is met, or that aren’t covered by your health insurance. These might include copays for doctor visits, dental bills, or getting prescription glasses.
But if you spend any amount of HSA funds on non-qualified expenses, like groceries or a ski trip, before reaching age 65, you’ll owe income tax plus a steep 20% penalty on those distributions.
What’s great about an HSA is that you own the account as an individual and control it completely—even when you get your health plan through an employer. You don’t need permission from an employer or the IRS to set up an HSA and it stays with you even if you change jobs or become unemployed.
There’s never a deadline to spend your HSA money. Funds can stay in the account indefinitely until you want to use them, even if you change your insurance company, become uninsured, or are unemployed.
There’s no maximum account balance limitation or any maximum income limits you have to meet to be eligible to contribute. You generally can use the funds for qualified medical expenses for you, your spouse, and dependents you claim on your tax return.
See also: How to Save Money on Healthcare with an HSA
How Much Can You Contribute to a Health Savings Account (HSA)?
The IRS sets limits on the total amount you can contribute to an HSA each year. There’s also a “catch up” policy that allows you to contribute an extra $1,000 when you're age 55 or older with either an individual or a family policy.
Here are the maximum HSA contribution limits for 2016:
- Individual (self-only) plans – allow up to $3,350 or up to $4,350 if you’re 55 or older.
- Family plans – allow up to $6,750 or up to $7,750 if you’re 55 or older.
In 2017 the contribution limit goes up slightly to $3,400 for individual plans, but there’s no change for family plans.
Who Can Have a Health Savings Account (HSA)?
All these HSA benefits sound great, but in order to qualify there’s a catch: You must first be enrolled in a high deductible health plan.
All these HSA benefits sound great, but in order to qualify there’s a catch: You must first be enrolled in a high deductible health plan.
These plans are just like regular health insurance policies, except that they have higher deductibles. That means you have to pay more out of pocket before your benefits begin.
Insurance deductibles and premiums always work like a see-saw. The higher your deductible, the lower your premium. Because you're responsible for more of your medical expenses, a high deductible plan typically costs less than a regular plan.
For 2016 and 2017, a policy deductible must be at least $1,300, or $2,600 for family coverage in order to be considered a high deductible health plan
See also: HSA Rules After Leaving a High Deductible Health Plan
How to Open Up and Contribute to a Health Savings Account (HSA)
If you qualify for an HSA, they're available at many banks, credit unions, brokerages, and specialty institutions like HSAbank.com. Most are convenient to use and offer paper checks, a debit card, and online banking.
You can make contributions at any time, even up to April 15 for the previous tax year. But you’re never required to make any contributions to an HSA.
There’s a unique way to fund your HSA for the first time, using money you’ve already saved in a traditional IRA. You can do a tax-free rollover from your IRA into an HSA once in your lifetime, up to the annual contribution limit. The trustee of your IRA simply transfers the funds to the trustee of your new HSA. That’s how I opened my first HSA many years ago.
Contributions to an HSA can come from you, someone else, or an employer. Some company benefits include regular deposits into an HSA, such as $150 a quarter. It’s similar to workplace matching funds for a 401k or 403b retirement plan because they’re not included in your taxable income.
However, unlike a 401k where employer matching allows you to exceed the annual limit, that’s not the case with an HSA. The amount you, another person, or your company contributes can never exceed the limits I previously mentioned, so you have to monitor it throughout the year.
See also: 7 Ways to Save on Healthcare and Fitness
Can You Have Multiple Health Savings Accounts (HSAs)?
I received a question about managing multiple accounts from a member of my Dominate Your Dollars Facebook group named Abeeku. He says:
“How many HSAs can I have? I just got a new job that will match contributions if I sign up with their HSA provider. But I already have one from my previous job. Would it be a good idea to keep the older HSA for long term investment purposes?”
Thanks for your great question, Abeeku. You can have as many HSAs as you like, however, you can’t exceed the annual contribution limits that I mentioned.
You can have as many HSAs as you like, however, you can’t exceed the annual contribution limit.
How to Consolidate Health Savings Accounts (HSAs)?
Many companies offer high deductible health plans and a recommended a preferred HSA. So what should you do if you’re like Abeeku and already have an HSA? Maybe you don’t want the hassle of having more than one.
First, compare the fees and options of both accounts to understand which one costs less and gives you more investment flexibility. If you decide that you only want a new HSA, here are your options:
- Open a new HSA, spend down your old account to zero and close it.
- Open a new HSA, rollover funds from your old account into the new one, then close the old account.
If you don’t want a new HSA, but are eligible for employer contributions, ask the payroll or benefits department if you can have deposits sent to your current institution. This should be easy to do; however, you may get some resistance because it takes a little extra administrative work.
If your employer insists that you open an HSA with their recommended institution in order to qualify for employer contributions, go ahead and comply so you don’t miss out on free money!
If you feel strongly that you want your contributions to end up in your existing account, there’s still a way to do it. You can move money from an employer-preferred HSA into your own in one of two ways.
The first is to do a rollover where the funds are sent from the HSA custodian to you. Then you send the money to another account custodian. As long as the transaction is completed within 60 days you don’t trigger taxes or a penalty. But you can only do an HSA rollover once a year.
Another option that isn’t limited in frequency is to complete a trustee-to-trustee transfer. One custodian sends the funds directly to another custodian. You can do this as often as you like with no taxes or penalty, however, you may be charged a transfer fee.
See also: Only 8% of Americans have an HSA and may be missing out on savings
What Can You Pay For With a Health Savings Account (HSA)?
Once you have money in an HSA, it’s important to understand how you can spend it without breaking the rules. The IRS says for an expense to be qualified, it must pay for healthcare services, equipment, or medications.
The IRS says for an expense to be qualified, it must pay for healthcare services, equipment, or medications.
Check out the full list of qualified expenses in IRS Publication 502, Medical and Dental Expenses. There are some you might not expect, such as acupuncture, chiropractic, drug addiction therapy, and capital expenses for home improvements related to medical issues.
You need a prescription to buy drugs (except for insulin) with HSA funds. So if you can get a prescription for drugs that are also available over-the-counter, such as Allegra, you can also buy them using tax-free HSA money!
You can also reimburse yourself for past medical expenses, if they occurred after your HSA was established. It’s a good idea to save all your prescriptions and receipts as backup for your taxes.
In general, you can’t use HSA funds to pay your health insurance premiums—unless you’re unemployed, are over age 65, or have a long-term care policy.
7 Major Benefits of a Health Savings Account (HSA)
If you’re eligible for an HSA, it’s a terrific and easy way to cut your taxes and save money on a variety of healthcare expenses. It can give you peace of mind when you have unexpected medical bills to know that you have savings to pay them.
Here are 7 major benefits of an HSA:
- Contributions are tax deductible up to the annual legal limit. That means you reduce your taxable income and the amount of tax you have to pay by funding the account.
- You never lose funds because they stay in the account from year to year for your entire life, with no penalty if you don’t spend them.
- Withdrawals are never taxed as long as you spend them on qualified medical expenses.
- Contributions grow tax-free when you have interest earnings or investment gains, as long as you spend them on qualified medical expenses now or in retirement.
- You can spend the funds on you, your family, or your dependents when there are qualified, unreimbursed medical expenses.
- You own it and can decide how much to save or spend each year. An HSA is portable, so if you change employers, switch health plans, or become unemployed, it’s yours to keep.
- If you no longer have a high deductible health plan you can’t continue making contributions, however, you can continue to spend the funds on qualified expenses.
Even though these are great benefits, remember that a high deductible health plan isn’t the right choice for everyone. They work best when you're in relatively good health and aren't likely to spend the full deductible each year.
If you can afford paying the higher deductible, having an HSA can help you build up savings to pay medical bills or to accumulate an additional nest egg to spend after age 65, especially if you’re already maxing out a retirement account.
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