The Health Savings Account (HSA) Rules You Need to Know

In today's world, where healthcare costs are on the rise, it's crucial to understand the various options available for managing healthcare expenses. One such option that has gained popularity over the years is the Health Savings Account (HSA). An HSA allows individuals to set aside pre-tax money to pay for qualified medical expenses. However, like any financial tool, HSAs come with their own set of rules and regulations. In this article, we will explore the important HSA rules that you need to know to make the most of this valuable healthcare savings option.

Understanding Health Savings Accounts (HSAs)

Before diving into the rules, let's take a closer look at what a Health Savings Account (HSA) actually is. An HSA is a tax-advantaged savings account that allows individuals to save money specifically for medical expenses. It is only available to individuals with a high deductible health plan (HDHP). The funds deposited into an HSA are tax-deductible, and any earnings on those funds are tax-free. HSAs offer a triple tax advantage – contributions are tax-deductible, growth is tax-free, and withdrawals for qualified medical expenses are also tax-free.

Eligibility Criteria for Opening an HSA

To open an HSA, you must meet certain eligibility criteria. These criteria include:

1. You must be covered by a high deductible health plan (HDHP).
2. You cannot be enrolled in Medicare.
3. You cannot be claimed as a dependent on someone else's tax return.

Contribution Limits for HSAs

HSAs have annual contribution limits, which are subject to change each year. For the year 2021, the contribution limits are as follows:

• For individuals with self-only coverage: $3,600
• For individuals with family coverage: $7,200

Additionally, individuals aged 55 or older can make an additional catch-up contribution of $1,000, regardless of whether they have self-only or family coverage.

Tax Advantages of HSAs

One of the major benefits of HSAs is the tax advantages they offer. Contributions to an HSA are tax-deductible, meaning they reduce your taxable income for the year. The funds within an HSA grow tax-free, allowing them to potentially accumulate over time. Withdrawals from an HSA are also tax-free, as long as they are used for qualified medical expenses. This triple tax advantage makes HSAs an attractive savings option for individuals looking to save for healthcare costs.

Qualified Medical Expenses

HSAs can only be used to pay for qualified medical expenses. These expenses include:

• Doctor visits
• Prescription medications
• Hospital stays
• Dental and vision care
• Medical equipment and supplies
• Qualified long-term care services

It's important to note that using HSA funds for non-qualified medical expenses may result in penalties and taxes on the withdrawal.

Using HSA Funds Wisely

While HSAs offer flexibility and tax advantages, it's important to use the funds wisely. Here are some key considerations:

1. Save for future medical expenses: HSAs are a great tool for saving for future medical expenses. By contributing regularly to your HSA, you can build up a fund to cover unexpected healthcare costs or save for medical expenses in retirement.

2. Pay attention to investment options: Some HSA providers offer investment options, allowing you to grow your HSA funds through various investment vehicles. If you have a long time horizon, consider investing a portion of your HSA funds to potentially earn higher returns.

3. Keep documentation for qualified medical expenses: To ensure compliance with IRS rules, it's important to keep documentation of all qualified medical expenses paid with HSA funds. This documentation may be required during an IRS audit to substantiate the use of HSA funds.

HSA Rules to Maximize Savings

While HSAs offer many benefits, it's essential to be aware of the specific rules and regulations that govern these accounts. Here are some important HSA rules that you need to know to maximize your savings:

HDHP Requirements

To be eligible for an HSA, you must be covered by a high deductible health plan (HDHP). An HDHP is a health insurance plan with a higher deductible than traditional health plans. For 2021, the minimum deductible requirements for an HDHP are:

• Self-only coverage: $1,400
• Family coverage: $2,800

It's important to choose an HDHP that meets these minimum requirements to be eligible for an HSA.

Prohibited Coverage

While you are covered by an HDHP, it's important to note that certain types of coverage can disqualify you from contributing to an HSA. These prohibited coverage types include:

• Coverage for non-preventive medical services before the deductible is met
• Coverage for non-prescription drugs
• Coverage for non-health-related benefits, such as dental and vision care (except for permitted preventive care)

If you have any of these types of coverage, it's important to consult with a tax professional or financial advisor to understand how it may impact your ability to contribute to an HSA.

Rollover and Portability

HSAs offer great flexibility in terms of rollovers and portability. Here are some key points to keep in mind:

• Rollovers: You can roll over funds from an existing HSA or an Archer Medical Savings Account (MSA) into your HSA without incurring taxes or penalties. This allows you to consolidate your healthcare savings into one account.
• Portability: HSAs are portable, meaning they belong to the individual and not the employer. If you change jobs or health insurance plans, you can take your HSA with you.

Coordination with Flexible Spending Accounts (FSAs)

If you have a Flexible Spending Account (FSA) through your employer, there are certain rules regarding coordination with an HSA:

• Limited Purpose FSA: You can have a Limited Purpose FSA alongside an HSA. A Limited Purpose FSA can only be used for eligible dental and vision expenses. This allows you to maximize your tax-advantaged savings by using the HSA for medical expenses and the Limited Purpose FSA for dental and vision expenses.
• General Purpose FSA: You cannot have a General Purpose FSA alongside an HSA. A General Purpose FSA can be used for a wide range of medical expenses. If you enroll in an HSA, you must opt for a Limited Purpose FSA or waive the General Purpose FSA.

Change in Eligibility

If your eligibility for an HSA changes during the year, it's important to be aware of the impact on your contributions:

• Mid-year eligibility: If you become eligible for an HSA mid-year, you can make a pro-rated contribution based on the number of months you are eligible. For example, if you become eligible in July, you can contribute 50% of the annual contribution limit.
• Loss of eligibility: If you lose eligibility for an HSA mid-year, you can still use the funds in your HSA for qualified medical expenses. However, you will no longer be able to make contributions to the account.

Medicare and HSA Eligibility

Once you enroll in Medicare, you are no longer eligible to contribute to an HSA. However, you can still use the funds in your HSA for qualified medical expenses. If you delay enrolling in Medicare and continue to have an HDHP, you can continue to contribute to your HSA until you enroll in Medicare.

Conclusion

HSAs are a valuable tool for managing healthcare expenses and saving for future medical needs. By understanding the rules and regulations governing HSAs, you can maximize the benefits of this tax-advantaged savings account. Remember to consult with a tax professional or financial advisor for specific guidance tailored to your individual situation. Take advantage of the tax benefits and flexibility offered by HSAs to ensure you are prepared for any healthcare expenses that may arise. With proper planning and adherence to the rules, you can make the most of your Health Savings Account.