Using an HSA? These 10 Allowable Expenses May Surprise You

I recently received a phone call from my husband who was on his way to the doctor for an annual checkup. He said, “Can I use our HSA debit card to pay for parking at the doctor’s office?” Adam is very savvy with money, so any time he has a financial question, I’m certain other people are wondering the same thing and I should write and podcast about it.

We love using our HSA (health savings account), because it’s a legal way to pay less tax and save for the future. But the IRS imposes many rules about how you can fund an HSA and spend the money. You need to be very familiar with the rules to leverage the account and use it to its full potential.

In this article, I’ll cover key points you should know about HSAs, review seven major benefits they offer, and answer my husband’s parking question. Plus, you’ll learn 10 often-surprising, but allowable expenses that you can pay for using an HSA.

10 Savvy Ways to Use an HSA

1. Prescription sunglasses 
2. Eye surgery 
3. Dental care 
4. Chiropractic 
5. Acupuncture 
6. Fertility enhancement 
7. Drug and alcohol addiction treatment
8. Care from a psychologist or psychiatrist 
9. Home improvements 
10. Transportation and travel

Before we go into more detail on these HSA savings, here's background on what an HSA is and who can use them to pay for approved medical expenses.

What Is an HSA (Health Savings Account)?

An HSA is a special tax-exempt account that you set up for the sole purpose of paying eligible medical expenses. But to qualify for one, you must first have a special type of health insurance, which I’ll cover in a moment.

The beauty of an HSA is that contributions are deductible on your tax return, even if you don’t itemize deductions.

You can contribute to an HSA if you get health insurance as an individual or through a group plan at work. You always own and manage an HSA as an individual and there are no income limits to qualify. That means you don’t need permission from an employer or the IRS to set one up and it stays with you even if you change jobs or become unemployed.

The beauty of an HSA is that contributions are deductible on your tax return, even if you don’t itemize deductions. The funds can earn interest or be invested for potential growth in a menu of available options, such as mutual funds. And when you take distributions to pay for qualified medical expenses, your original contributions plus any earnings are completely tax-free.

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. Just like with matching funds for a retirement plan (such as 401k or 403b), HSA contributions from an employer are not included in your taxable income, a fantastic benefit!

Depending on your income tax rate, using an HSA to pay for allowable medical expenses means getting about a 20% to 30% discount. Over your lifetime, that can add up to huge savings!

Unlike another type of medical savings account called a Flexible Spending Arrangement (FSA), there’s no deadline to spend money in an HSA. Funds can stay there indefinitely until you want to use them, even if you change your insurance company, become uninsured, or are unemployed.

Depending on your income tax rate, using an HSA to pay for allowable medical expenses means getting about a 20% to 30% discount. Over your lifetime, that can add up to huge savings!

So, don’t confuse these two popular medical savings accounts:

• FSA, or flexible spending arrangement, is a health savings account that’s offered by employers only and must be funded through payroll deductions on a pre-tax basis. It comes with an annual use-it-or-lose it policy. 
• HSA, or health savings account, can only be opened by individuals and permits tax-deductible contributions with no spending deadline.

Just like with a retirement account, you should never put money in an HSA that you might need for everyday expenses. You can only use HSA funds to pay for current or future qualified, unreimbursed medical expenses—otherwise withdrawals are subject to income tax plus a hefty 20% penalty.

However, an often-forgotten benefit is that after your 65th birthday, you can spend HSA funds on non-medical expenses with no penalty. You can spend the funds on anything you like, such as a trip to Europe, and it would simply be subject to ordinary income tax.

In other words, an HSA morphs into something that looks like a traditional retirement account if you keep it long enough. That’s a great reason to max it out every year, even if you don’t expect many medical expenses.

See why I like HSAs so much? The tax benefits are better than a retirement account. You get:

• Tax deductible contributions
• Tax free earnings
• Tax free withdrawals
• Penalty-free withdrawals after age 65

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What Is a High Deductible Health Plan?

I mentioned that you need a special type of health insurance to qualify for an HSA. It’s called a high deductible health plan (HDHP). A deductible is the amount you must pay for covered medical expenses before your benefits begin each year.

While you might think that it’s better to have a lower deductible and pay less out-of-pocket, having a higher deductible reduces your monthly insurance premiums. Deductibles and premiums have a seesaw relationship because increasing one generally makes the other go down.

More employers are offering HDHPs to help workers keep premiums as low as possible. No matter if you get health insurance on your own or through work, find out if it’s an HSA-qualified plan, so you can get all the medical savings possible!

But 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.

You can make tax-deductible contributions at any time during the year, even up to April 15 for the previous tax year. But you’re never required to make contributions to an HSA.

See also: HSA Rules After Leaving a High Deductible Health Plan

How Much Can You Contribute to an HSA?

For 2018, you can contribute a total of up to $3,450 to an HSA when you have insurance just for yourself, or $6,850 if you have a family plan. If you’re age 55 or older you can contribute an additional $1,000 to an HSA when you have either an individual or a family health plan.

You can make tax-deductible contributions at any time during the year, even up to April 15 for the previous tax year. But you’re never required to make contributions to an HSA.

If you qualify for an HSA, they're available at many banks, credit unions, brokerages, and specialty institutions. Most are convenient to use and offer paper checks, a debit card, and online banking. A couple of great places to open your account are Lively and HSA Bank.

See also: How to Save Money on Healthcare with an HSA

What Are Allowable HSA Expenses?

Once you’ve opened an HSA and have a balance to spend, understanding what you can spend it on is critical. Allowable expenses include a wide range of medical costs you might incur until you meet your annual deductible, or that simply aren’t covered by your health plan.

The IRS says for an expense to be HSA-qualified, it must pay for healthcare services, equipment, or medications. There are many covered expenses that you might not expect, and I’ll cover 10 of them in a moment.

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! And if you mistakenly pay for a qualified expense out of pocket, you can reimburse yourself from the account (if the expense occurred after your HSA was established).

See also: Rules for Your Health Savings Account (HSA)

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10 Savvy Ways to Use an HSA

There are hundreds of potential HSA-qualified medical expenses and you can see the full list in IRS Publication 502, Medical and Dental Expenses. But I’ll cover 10 allowable expenses for yourself or a family member that may surprise you.

1. Prescription sunglasses

Paying for an annual eye exam and new prescription sunglasses are one of my favorite ways to spend HSA money. Of course, regular prescription eyeglasses and contact lenses are also qualified expenses.

2. Eye surgery

Any costs you might have to pay out-of-pocket for surgery to correct your vision, such as LASIK or the removal of cataracts, can be paid for using HSA funds. And if your vision or hearing is impaired, you can also use it to purchase and care for a guide dog or other service animal.

3. Dental care

Going to the dentist is also covered for routine cleanings and the prevention of dental disease. You can use your HSA for services such as fluoride treatments, X-rays, fillings, extractions, dentures, and braces. Teeth whitening is not a qualified expense, nor is any cost or treatment that’s purely cosmetic.

4. Chiropractic

All chiropractic care is HSA-qualified, even if it isn’t covered by your insurance plan. So, don’t hesitate to seek it as an alternative for pain relief before you go for medication or surgery.

5. Acupuncture

I’ve never received an acupuncture treatment, but I know several people who have used it to successfully treat allergies, pain, and infertility. So, if you’ve been wanting to give acupuncture a try, but it isn’t covered by your health insurance, you could pay for it tax-free using an HSA.

Remember: Funds remain in the account from year to year for your entire life, with no penalty if you don’t spend them.

6. Fertility enhancement

And speaking of infertility, you can use an HSA to pay for any treatment to overcome an inability to have children, such as in vitro fertilization. Once you’re a parent, you can also spend it on breast pumps and supplies that assist lactation.

Or you can use an HSA to go the opposite direction and pay for birth control, sterilization, or a legal abortion.

7. Drug and alcohol addiction treatment

Any amount you pay for yourself or a family member to have inpatient treatment at a drug rehabilitation center, including meals and lodging, is HSA-qualified. You can also pay for transportation to and from Alcoholics Anonymous meetings in your community.

8. Care from a psychologist or psychiatrist

Costs to support yourself or a family member through the treatment of a mental condition or illness is HSA-qualified. You can use HSA funds to pay for a patient’s treatment at a health institute if treatment is prescribed by a physician to alleviate a physical or mental disability or illness.  

9. Home improvements

Any special equipment or improvements installed in a home to care for you or your family members can be paid for with HSA funds, if their purpose is medical care. These might include constructing entrance ramps, widening doorways, installing lifts, or lowering cabinets and sinks.

Another capital expense that’s HSA-qualified is the removal of lead based paint in a home you own or rent.

10. Transportation and travel

Costs to get to and from any type of medical care, whether it’s on a bus, taxi, train, plane, or ambulance, can be paid for with HSA money. This includes making regular visits to see an ill family member, if visits are recommended as part of treatment. You can include lodging, but not meals, when you travel to another city for medical purposes.

And getting back to my husband’s question, if you use your own vehicle to get to medical services, you can include out-of-pocket costs, including, gas, oil, tolls, and parking fees, as HSA-qualified. However, you can’t include general vehicle maintenance or insurance costs.

7 Major Benefits of an HSA

To sum up, here are 7 major benefits of having an HSA:

1. Contributions are tax deductible up to the annual legal limit. That means you reduce your taxable income and the amount of tax you must pay by funding the account. 
2. Funds remain in the account from year to year for your entire life, with no penalty if you don’t spend them.
3. Withdrawals are never taxed if you spend them on qualified medical expenses.
4. Your balance grows tax-free when you have interest earnings or investment gains, if you spend them on qualified medical expenses.
5. Funds can be used for you, your family, or your dependents when there are qualified, out-of-pocket, medical expenses.
6. You own the account and 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.
7. You can fund an HSA for the first time using money you’ve already saved in an IRA by doing a tax-free rollover from your IRA into an HSA once in your lifetime, up to the annual contribution limit.

See also: 10 IRA Facts Everyone Should Know

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