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Health Savings Account | Eligibility, Contribution Limits, Tax Benefits & How to Open ?

Health Savings Account (HSA)

Medical costs typically rise as a person gets older, especially once they retire and beyond. A tax-advantaged account called a health savings account (HSA) enables you to set aside money for future medical costs. Saving money for health expenses including copays, deductibles, prescription drugs, over-the-counter medicines, and more is possible with a Health Savings Account. The information you need to choose a decent HSA and where to buy one is provided here.

What is a US Health Savings Account (HSA) ?

A Health Savings Account (HSA) is a tax-advantaged account created by individuals covered under high-deductible health plans (HDHPs) to save for qualified medical expenses. A maximum annual contribution may be made to the account by either the individual or their employer. The HSA contributions are invested over time and can be used to pay for qualified medical expenses, such as dental, medical, prescription drugs, and vision care.

If you're enrolled in a high deductible healthcare plan that qualifies, an HSA is a particular kind of tax-free savings account that you can use to save money for medical bills. If you don't use the funds in the plan for medical bills, Health Savings Accounts can also be used as a long-term savings tool.

If you have a high deductible health insurance plan, you will be responsible for all medical costs up to your deductible before your insurance coverage begins. Your HSA will help you in covering any medical costs that the insurance plan does not pay for. You must be enrolled in a high-deductible health plan in order to qualify for HSA. Health savings accounts offer substantial tax benefits, and some people utilize them in conjunction with their 401(k) or IRA accounts as retirement plans.

Key Facts of Health Savings Account

  • A tax-advantaged account called a health savings account is created with the purpose of being used to save money for future medical costs.
  • HSA are associated with high-deductible health plans (HDHPs).
  • An employee's HSA may be funded by both the employee and the employer.
  • Contributions have a one-year vesting period, and unused account balances at year's end may be carried over.
  • With tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for eligible medical costs, an HSA offers triple tax advantages.
  • If you have an HSA through your employer-sponsored health insurance plan, your employer may offer a matching contribution.
  • To open an HSA, you must be enrolled in a high deductible health plan that qualifies.

How Does a Health Savings Account Work ?

A health savings account is a unique type of savings account designed specifically for paying for medical bills. These accounts, which are funded with pretax dollars, may be available with high-deductible health insurance. You can utilize the funds in your health savings account to pay for eligible medical costs. Which expenses are eligible is a matter for the Internal Revenue Service (IRS). Numerous over-the-counter medications are also covered.

The insured person makes contributions to the health savings account. Whether you have individual or family coverage affects how much you can contribute. Contribution levels are subject to fluctuate between tax years. The yearly contribution caps for HSAs are established by the IRS and are periodically updated to account for inflation.

HSA contributions are made with pretax dollars. This indicates that you will avoid paying income tax on funds deposited directly into your HSA and that you will do so during the whole tax year. Employers may match employee contributions to an HSA, but the total of all employee and employer contributions cannot go over the yearly cap for the chosen coverage option.

On the other hand, if your HSA funds are not used appropriately, it will cost you money to access them once they are in the account. If you take money out of your HSA before you turn 65 to pay for non-qualified costs, you will be responsible for income taxes as well as a 20% penalty.

Who is Eligible for an Health Savings Account ?

People with HDHPs can open HSAs. Since the two are frequently combined, you will be given an HSA when you enroll in a qualifying plan. The taxpayer must fulfil eligibility standards, established by the Internal Revenue Service in order to be qualify for an HSA. An eligible individual is someone who :
  • Has a 18 years of age or older
  • Has a qualified high-deductible health plan (HDHP).
  • Has no other health coverage.
  • Is not enrolled in Medicare.
  • Is not claimed as a dependent on someone else’s tax return.

Additionally, an HSA can be opened at some financial institutions. Employer-sponsored plans can be paid by both the employee and their employer, but contributions can only be made in cash. A family member or any other individual is permitted to make contributions to an eligible person's HSA. If a person is self-employed or unemployed, they are also eligible to make contributions to an HSA.

What Expenses Are Eligible for HSA ?

There are numerous uses for your money, but since they may differ by plan, so when you get an health savings account, you will need to ask for a list of covered expenses. Here are a few instances of typical HSA qualified expenses :
  • Ambulance services
  • Artificial limbs
  • Birth control (over-the-counter or prescription)
  • Breast pumps
  • Chiropractors
  • Contact lenses and eye exams
  • Drug treatment
  • Dentists
  • Fertility enhancement
  • Lab fees
  • Long-term care
  • Nursing home care and nursing services
  • Prescription medicines and eyeglasses
  • Physical exams
  • Pregnancy tests
  • Surgery
  • Therapy
  • Vision correction
  • Weight-loss programs

Health Savings Account Rules

An HSA does not require the use of or withdrawal of contributions made during the tax year. Instead, any unused contributions may be carried over to the following year and they are vested. Additionally, an HSA is portable, so employees can still use it even if they change employment.

Upon the account holder's death, an HSA plan may also be passed tax-free to the surviving spouse. The account is no longer treated as an HSA, however, and the beneficiary is taxed on the account's fair market value, reduced for any qualified medical expenses of the decedent paid from the account within a year of the date of death. This happens if the designated beneficiary is not the account holder's spouse.

What is the HSA Contribution Limits ?

The sum of the contributions made by the employer and the employee is subject to the yearly contribution limits. The Internal Revenue Service adjusts the limits each year for inflation. The HSA contribution limits are :

HSA contribution limits :
  • For 2022, the maximum contribution amounts are $3,650 for individual coverage and $7,300 for family coverage.
  • For 2023, the maximum amounts are $3,850 for individuals and $7,750 for family coverage.
  • You can add up to $1,000 more as a "catch-up" contribution if you are age 55 or older.

HSA Withdrawal Rules

As long as funds are utilized to cover services that the IRS recognizes as eligible medical costs, withdrawals from an HSA aren't subject to taxes. You should be aware of the following fundamentals :
  • Deductibles, dental care, vision care, prescription medications, co-pays, psychiatric treatments, and other eligible medical expenses that are not covered by a health insurance plan are examples of qualified medical expenses.
  • Insurance premiums are not considered eligible medical expenses unless they are paid for Medicare, another form of healthcare coverage, COBRA health insurance, coverage for unemployment benefits, or long-term care insurance, subject to yearly adjusted limits. Medicare supplemental or Medigap insurance premiums are not considered to be eligible medical expenses.

Tax Benefits of an Health Savings Account

HSAs are tax-advantaged accounts. That indicates that they provide certain tax advantages to consumers who select a high-deductible health plan. These tax benefits include:
  • Tax-deferred growth
  • Tax-deductible contributions
  • Tax-free withdrawals when used for qualified medical expenses

An HSA's funds also carry over from year to year. The money in your account will still be there the following year if you make contributions this year but do not have any medical expenditures for which you need to use HSA funds. Even if you switch employers, the money will still be kept in your HSA account. Your HSA contributions can be invested as well, allowing them to grow and generate income.

Note :
You can often access health savings accounts with a debit card, and there is probably an online account you can use to monitor your balance, request withdrawals, and more.

HSA Tax Implications

Once your employer has established payroll deductions for you, the money that is deposited into your HSA account is free from taxes.

When you prepare your federal income taxes, you will be eligible to claim a tax deduction for the money you contributed to your HSA, if your employer is not deducting it from your payroll.

HSA Special Consideration

HDHPs are less expensive than other health plans but have higher yearly deductibles. Depending on your specific circumstances, an HDHP's low-premium and high-deductible structure may provide financial advantages.
  • The minimal deductible in 2022 is $1,400 for individual and $2,800 for families. Maximum out-of-pocket costs for individuals are $7,050 and for families, they are $14,100.
  • The minimal deductible in 2023 is $1,500 for individual and $3,000 for families. Maximum out-of-pocket costs for individuals are $7,500 and for families, they are $15,000.
Additional qualified expenses are split between the individual and the plan when a person pays qualified medical expenses equivalent to the deductible amount of a plan. The plan normally pays for any further medical expenditures after the yearly deductible is met during a given plan year, with the exception of any fees not covered by the contract, such as co-pays. The insured may take money out of an HSA to pay for these out-of-pocket costs.

Note :
Non-medical distributions given after the day you become disabled, turn 65, or pass away are not subject to an additional tax. You are however still liable for paying income tax.

HSA Withdrawal Penalty

The amount of any withdrawals from an HSA that are used for anything other than eligible medical expenses are subject to income tax as well as an additional 20% tax penalty. However, after age 65, the 20% tax penalty is eliminated, and non-qualified withdrawals are simply subject to income tax.

How to Open an Health Savings Account ?

You first need to enroll for an high-deductible health plan (HDHP). You can work with an associated HSA provider for the majority of employer-sponsored HDHPs. It's simple to open a HSA. You can create an account with :
  • Banks
  • Credit unions
  • Brokers and financial advisors
  • Insurance companies
Each health savings account provider is free to set their own rules. You can even invest your contributions in equities, bonds, or funds when you open an HSA through a brokerage. Typically, bank HSAs provide the optimal interest rate. The enrolling procedure is very simple once you select a provider. You'll need to fill out an application with details about your HDHP. You can fund the account and start using the funds for permissible spending as soon as your account has been approved.

If an HSA is a part of your workplace health insurance coverage, you might inquire with your employer. You can check the specifics of your plan to determine if you have the option to set up an HSA if you're self-employed and responsible for paying your own health insurance.

Frequently Asked Questions

Do I lose the funds in my HSA, if I change jobs?
No, you own the health savings account. You keep all of the money you put into an HSA, just like you would in a savings account. Even if you don't use all of your HSA funds in a single year, they will simply carry over to the following year.

What happens to my health savings account if I lose my health insurance?
Once you have funds in your HSA, you can utilize them even if you no longer have a high-deductible health insurance plan, but you cannot continue to make contributions to your HSA.

Can someone receive the money in my HSA, if I pass away?
Yes, your designated beneficiary will get the funds from your health savings account, just like they would from a 401(k) or other retirement account.

If I retire, does my HSA contribution limit increase?
If you are 55 years of age or older, you may contribute an additional $1,000 over and above the standard contribution limits. You can contribute to an HSA without having earned income, unlike an IRA donation.

Can a non US citizen open an HSA?
No, an health savings accounts account holder must be a U.S. citizen living in the United States or a resident alien.

Who is not eligible for HSA?
You will immediately be enrolled in Medicare Part A if you sign up for Social Security, which will disqualify you from making contributions to an HSA. Only if you postpone receiving Social Security can you delay enrolling in Medicare Part A. You have till the age of 70 and a half before you must start receiving Social Security.

What can health savings accounts be used for?
Medical expenses that qualify can be covered through health savings accounts. There is a long list of expenses that you can pay for with HSA funds that is kept up by the IRS. A tax penalty may apply if HSA funds are used for ineligible expenses.

Who offers health savings accounts?
High-deductible health plans, such as those provided by employers and those purchased through the federal Health Insurance Marketplace, offer health savings accounts. Banks, brokerages, and other financial institutions may hold and manage HSAs on behalf of the insurance provider.

Can a self-employed person open a health savings account?
You can open a Health Savings Account if you have a high-deductible health plan (HDHP). If you work for yourself, you should research the HSAs provided by banks or brokerages like Fidelity, HealthEquity, or Lively. Make sure you carefully consider your options to get the finest HSA for your need.

Do I have to use all of the money in health savings account every year?
No, your HSA payments can roll over annually. Users can accumulate money for more expensive medical needs or utilize it as an investment fund after retirement because the monies can also be invested.

Can I use HSA funds to pay insurance premiums?
The majority of medical costs, including visits to the doctor, prescriptions, and over-the-counter treatments, can be covered by HSAs, but not your monthly premium. The only exception to this rule is if the money is used to cover Medicare premiums or other forms of healthcare continuation coverage while you're receiving unemployment benefits, such as COBRA. Using your HSA, you can also pay for long-term care insurance.

Can I open an health savings account on my own?
Yes, if your workplace offers one, you can open one through them. However, you can also open one through a bank or credit union.

What is the cost to open a health savings account?
An HSA can be opened for free, but once it is, some banks may impose administrative or other costs.

Does HSA Money Expire?
No, the funds you deposit into your HSA will remain in your account indefinitely. As a result, unused funds in an HSA roll over at the end of the calendar year and are still accessible for subsequent medical costs.

Can I withdraw money from HSA?
Yes, Your HSA is available for withdrawal at any time. However, bear in mind that if you use HSA funds for anything other than a qualified medical expense, you will be subject to ordinary income tax and an additional 20% penalty from the IRS.

How can I use health savings account money?
You, your spouse, and your dependents may utilize the funds in your HSA to cover certain medical costs. In IRS Publication 502, Medical and Dental Expenses, the IRS outlines what constitutes and does not constitute a qualified medical expense.

Where can I set up an HSA?
You must first have a health insurance plan that qualifies. You can speak with your employer if you believe you have a high-deductible health insurance plan (HDHP). Numerous financial institutions, including banks, credit unions, brokers, and insurance companies, allow you to set up an HSA.

What expenses are not covered by HSA?
Other items that aren't eligible include toiletries, funeral costs, maternity clothes, child care for healthy babies, over-the-counter medicine, elective cosmetic procedures and swimming lessons. In most cases, unless you meet specific requirements, you cannot use HSA funds to pay for health insurance premiums.

What are the benefits of health savings account?
Payroll deductions made by both employers and employees for HSA contributions are not included in the employee's taxable income. Direct contributions made by a person to an HSA are entirely tax deductible from the employee's income. The account's earnings are likewise tax-free. However, further payments to an HSA are not tax deductible and are subject to a 6% tax.
As long as the money is spent on IRS-approved medical expenses, distributions from an HSA are tax-free. The HDHP deductible is taken into account when calculating whether distributions utilized for medical costs protected by the HDHP plan have been fulfilled. Additionally, you can invest funds from your HSA in stocks and other types of securities, which may result in longer-term gains.

What is the downside of an HSA?
You must be a strong candidate for an HDHP, which is the main downside that is immediately apparent. Additionally, in order to take advantage of the tax benefits and large deductibles, you must have a high deductible plan, pay reduced insurance premiums, or be wealthy enough to do so.
People who pay for their own HSAs, either directly or through payroll deductions, should be able to afford to set away enough money to cover the deductibles for their HDHPs. The high deductible amount may be problematic for people who don't have enough extra money to invest in an HSA. HSAs also include record-keeping obligations that may be challenging to manage, procedures that must be followed for withdrawals, and filing requirements for donations.

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