Health Savings Account (HSA)

Is a type of personal savings account you can set up to pay certain health care costs. An HSA allows you to put money away and withdraw it tax free, as long as you use it for qualified medical expenses, like deductibles, copayments, coinsurance, and more. You’re eligible to contribute to an HSA when you’re covered by certain high deductible health plans (HDHPs).

With HDHPs, the monthly premium is usually lower, but you pay more health care costs yourself before your insurance company starts to pay its share. You can’t contribute to an HSA if you have Medicare coverage, or a plan that pays its share of a covered service without you having to pay deductibles or copayments first (called “first dollar coverage”).

Banks, insurance companies, and other financial institutions offer HSAs. The money you contribute to the account isn’t taxed as long as it’s used for qualified, out-of-pocket medical costs, like:

• Acupuncture
• Ambulance costs
• Doctor visits n Hearing aids
• Prescription drugs
• Psychological therapy/psychiatric care
• Deductibles
• Qualified long-term care services

Sometimes, you can spend the money on similar medical costs for your spouse or dependents, and your money rolls over year-to-year if you don’t spend it.

What are the benefits of an HSA?

• No federal income tax. You aren’t taxed on money you put into it, or on interest earned, in an HSA account. You also don’t pay tax on withdrawals for qualified medical expenses. Note: Generally, insurance premiums aren’t considered qualified medical expenses.
• No expiration date on funds. Your HSA contributions don’t expire. The money stays in the HSA until you use it.
• Possible use for spouse and dependents. Sometimes, you can use your HSA to pay for qualified medical expenses for your spouse and dependents, even if your high deductible health plan doesn’t cover them.
• HSA doesn’t go away if job changes. You can keep your HSA, even if you change employers or retire.

How do HSA contributions and withdrawals work?

You can only contribute to your HSA when you’re enrolled in a qualified high deductible health plan with no other coverage that disqualifies you. Anyone can contribute to your HSA, like household members, friends, and employers. The table below shows the maximum amounts you can put into an HSA in 2022 and 2023. These limits may depend on the type of high deductible health plan coverage you have (self-only or family), your age, and when you qualified for an HSA. If you’re 55 or older, you can contribute an extra $1,000 to your HSA each year. This is called a “catch-up” contribution. If your spouse is also 55 or older, they can make a catch-up contribution to their own account, if eligible, but not to yours.

The money you take from your HSA to pay for or be reimbursed for qualified medical expenses is tax free.

• If you take money before you’re 65 from your HSA for non-medical costs, or medical costs that don’t qualify, you’ll have to pay the federal income tax and a 20% tax penalty.
• If you take funds from your HSA after you’re 65 for non-medical costs, you won’t have to pay the 20% tax penalty, but you’ll still have to pay the federal income tax on that amount

Also, you must stop contributing to your HSA when you enroll in any part of Medicare. But you may withdraw money from your HSA at any time to help pay for qualified medical expenses that Medicare or Medicare Supplement Insurance (Medigap) doesn’t cover.

Keep receipts for medical expenses you paid for using HSA withdrawals. You’ll need them to show the HSA money was only used to pay or reimburse qualified medical expenses. It’s your responsibility to keep records of your medical costs and decisions, in case the Internal Revenue Service (IRS) audits you.

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