Using a health savings account (HSA) to supplement your current health insurance coverage is a great way to save money on your health care costs. Along with saving money on your health care costs, your HSA can get your money working for you by earning interest and providing tax benefits. You can save your HSA money tax-free.
Here are some frequently asked questions to get a jump-start on understanding your HSA.
- A health savings account (HSA) is a tax-free savings account that can help you save money for health costs like copays, deductibles, prescription medications, over-the-counter items, and more.
- To start an HSA, you need to have a qualifying health insurance plan, which carries a high deductible.
- Every year the amount you can contribute to the HSA is revised.
- You can invest the funds in your HSA, similar to how you'd invest in a 401(k).
How Do I Start an HSA?
First, you have to have a qualifying health insurance plan. A qualifying health insurance plan is one that carries a high deductible. If you think you have a high-deductible health insurance plan (HDHP) then you can contact your employer, health insurance company, or a number of private insured banks and credit unions locally or online to find out about setting up an HSA.
A high-deductible health plan may sound scary, but the limits for a health plan to qualify as a "high deductible plan" are not so bad considering the savings on premium payments and the tax advantages.
For example, to qualify for a high-deductible health plan in 2022, the minimum deductible is $1,400 for individual coverage or $2,800 for a family plan. Each plan will be different, so ask about your options.
Consider that if you build up your savings in your HSA, you may save up enough to cover your deductibles for an HDHP fairly quickly.
How Much Can I Contribute to My HSA?
Every year the amount you can contribute to the HSA is revised. For 2022 these are the limits:
- A single person can contribute up to $3,650 per year in 2022, up from $3,600 in 2021
- A family can contribute up to $7,300 per year in 2022, up from $7,200 in 2021
The number changes slightly every year. As a comparison point, in 2018 the number was $3,450 for a single plan and $6,900 for a family plan.
Do I Pay Taxes on the Money Before It Is Put Into My HSA?
No, the money goes into your HSA account tax-free if your employer will set up paycheck deductions for you.
If you are not having your employer doing payroll deductions for your contribution, then when you prepare your federal income taxes you will be able to take a deduction for the money you contributed to your HSA that year.
Do I Pay Taxes When I Withdraw Money From My HSA?
When you withdraw your health savings account money to pay for any qualifying expenses, it is withdrawn tax-free. However, if you don't use a distribution from your HSA for qualified medical expenses, you must pay taxes on the distribution. There is an additional 20% tax on the part of your distributions that are not used for qualified medical expenses, as well.
There is no additional tax on non-medical distributions made after the date you become disabled, reach age 65, or pass away. However, you are still subject to income tax.
What Counts as a Qualifying Expense?
Here are some examples of HSA qualifying expenses:
- Prescription medicines and eyeglasses
- Office visit co-pays
- Over-the-counter meds such as aspirin and antacids
- Birth-control (over-the-counter or prescription)
- Laser eye surgery
There are many things that you can use your money for, but they may vary by plan, so when you get an HSA plan, you will need to ask for a list of covered expenses.
What Happens If I Lose My Health Insurance?
Once you have money in your HSA, you can continue to use it even if you do not have a high-deductible health insurance plan anymore, but you cannot keep contributing money to your health savings account.
Can I Use My HSA Money to Pay for Health Insurance Premiums?
You can use your HSA money to pay for your health insurance premiums while you are collecting federal or state unemployment benefits. You can also use your HSA money to pay for COBRA premiums, qualified long-term care insurance, and if you are age 65 or older, Medicare and other health coverage (excluding Medigap).
Can I Use My HSA to Pay for Medical Care in Another Country?
Yes, your HSA money can be used for the same medical expenses anywhere and in another country.
If I Switch Jobs Will I Lose the Money in My HSA?
No. The health savings account is yours. Whatever money you contribute to your HSA you keep, just as you would in a savings account. Even if you don't use all your HSA money in one given year, the money will just roll over to the next year for use.
Can the Money in My HSA Be Invested?
Yes, the funds within your health savings account can be invested in a way that is similar to a 401K. By investing in your HSA, you can take advantage of tax-free growth, and also embrace powerful tax advantages you can’t find through other traditional investment or savings vehicles.
An HSA offers flexibility, in that you can make pre-tax contributions, grow tax-free earnings, and enjoy tax-free distribution for qualified medical expenses. In most cases, investing in an HSA can provide the potential for long-term growth and significant tax savings. If you invest in both a 401(k) and an HSA in tandem, for example, your retirement strategy can be extremely strong.
When I Die, Can Someone Receive my HSA Money?
Yes. You can name a beneficiary to receive your health savings account money.