Health Savings Accounts (HSAs)

Health Savings Accounts are among the most misunderstood accounts when it comes to taxes and health care. Let's try to set the record straight and potentially save you some money...

An HSA is a tax free savings account used for healthcare expenses. Contributions are deducted from wages via your employer or as a direct adjustment on your 1040 if you make the contributions directly. 

Myth #1:  You an only contribute to an HSA through your employer. In fact, you can make DIRECT contributions to the account by writing a check from your personal account and depositing it into the HSA. (This can often be done electronically too.)

Myth #2:  HSAs are too much paperwork and not worth the hassle. An HSA is very easy to set up. It is just like opening up a savings account. Any bank will be happy to open an HSA for you. There is very little paperwork associated with owning and using an HSA account if it is used properly.

Myth #3:   I can't use the account if I already paid a health care expense from my regular checkbook or credit card.  Health care expenses incurred while the HSA account was open can be reimbursed to the account holder if they were paid from a personal checking account or cash or credit card. Simply make a withdrawal from the HSA, keep the related receipt for the health care expense, and there is no tax issue.

Myth #4:   The HSA account must be through my employer or insurance company.  You can have 1 or more HSAs and the account(s) can be through any bank or insurance company, unrelated to your employer or health insurer.

Here are some guidelines for using an HSA to pay for your healthcare expenses:

1)   In order to contribute to an HSA, your health insurance policy must be "HSA qualified". Simply check with your insurer or employer to verify. When choosing a plan, choose one with an HSA option. You cannot contribute to an HSA if you DO NOT have qualifying health coverage.

2)   HSAs are not available once you go on medicare. You cannot contribute to an HSA after you start medicare.

3)   Contribution limits apply on an annual basis depending on whether or not you have single or family coverage. Contribute as much as possible to the account as the account contribution is limited. Folks 55+ can add a bit more to their HSAs if they meet the other qualifications.

4)    HSAs can be used to pay for virtually any healthcare expense including medical, dental, eye, chiropractic, alternative health provider, prescriptions, mental health, etc. Download a list of detailed items that qualify from hsabank.com.

5)    HSAs can be used for the account owner, his spouse, and dependents, even if they are not on the same insurance plan.

6)     HSAs reduce your tax liability significantly. If you are paying for healthcare expenses with "after tax" dollars, you are paying tax on the money before you pay the expense. 

7)    Once you get "on board" with the HSA bandwagon, PAY FOR ALL OUT OF POCKET EXPENSES using the HSA. Add money to account as needed (subject to annual contribution limits).

8)    If you have receipts for medical expenses that were paid for with your regular checking account and were incurred while the HSA policy and account were in force, you can correct the situation by withdrawing an amount equal to the expense from the HSA. This allows you the opportunity to contribute money to your HSA, take a tax deduction, and then reimburse yourself for the expense.

9)    Bank HSAs pay a low interest rate. Some HSA banks partner with brokers and allow you to invest some of your HSA money via the related brokerage account, hopefully earning a better return on your money.

Earnings are tax free!

10)   HSA funds stay with you when you change employment or retire, even if you go on medicare. So you can use them anytime in your lifetime for healthcare expenses.

11)    Keep your receipts for all medical bills. At tax time, you will receive a form 1099-SA from your HSA bank which shows your annual amount of contributions and distributions. This information will flow to Form 8889 on your tax return and you will gain a tax deduction for any direct contributions (non-employer) you made to your HSA. Your distributions will be non-taxable if used for qualifying expenses. (Most taxpayers gain NO tax benefit from itemizing medical expenses because most taxpayers don't itemize and even those who do, have a threshold that must be exceeded before any amounts are deducted.)

Tax Reform should not change anything about HSAs as far as we know now.

It takes a few minutes to open the account and learn how to use it. It takes 2 minutes per year to enter the contribution and distribution amount into your tax organizer (along with form 1099-SA). Most taxpayers will save many hundreds (thousands?)  of dollars using the HSA versus not using the HSA.

HSA Bank is a good place for additional information on HSAs. From their website which is updated more frequently than this page, you can learn about annual contribution limits etc. It is also a good place to open your HSA if you don't already have one.

Link to HSA Bank .com