Updated March 20, 2019: A health savings account (HSA) helps people with high-deductible health care plans (HDHPs) cover out-of-pocket medical expenses. An HDHP charges lower monthly rates than traditional health insurance, but requires participants to pay the full price of hospital and doctor bills until their spending meets a certain threshold — aka the plan’s deductible. For 2019, the Internal Revenue Service defines an HDHP as plan with a deductible ranging from $1,350 to $6,750 for individuals.
HSAs are instrumental to shouldering that potentially high cost of medical care. They’re also helpful in terms of reducing your taxable income. But there’s some basic info you should know before you open one. Read on to learn how to choose and open a health savings account.
What is a health savings account (HSA)?
HSAs are medical savings plans that let you set aside funds for current and future health care expenses. They are only available to individuals and families who participate in a HDHP. HSAs can be used to pay for a wide range of things, including copays or coinsurance for doctor appointments, hospital visits and prescriptions. They can also be used to pay for other medical expenses that health care plans won’t typically cover, like bandages, reading glasses, sunscreen and certain over-the-counter medicines, so long as you have a doctor’s prescription.
There are several tax advantages to HSAs:
Contributions to HSAs are 100% tax-deductible.
Withdrawals are tax-free when used to pay for eligible medical expenses.
Interest and investment earnings are tax-deferred and tax-free when used to pay for eligible medical expenses.
Unlike flexible spending accounts (FSAs), HSAs aren’t “use it or lose it”. Funds get carried over from year to year and between jobs. So even if you ditch your HDHP for traditional health insurance, you can use previously saved HSA funds for medical expenses tax-free.
“Once funds are in the account you no longer need a HSA-qualified policy to use the funds," Larry Medcalf, health insurance agent and owner of indyhealthagent.com, says. "So funds can be used in the future, even if you're no longer covered by a HSA health policy.”
It’s a good idea to sign up for an HSA if you have an HDHP. If you don’t use all your contributions, you can save them for future medical costs or even invest them to use in retirement.
Who is eligible for an HSA?
You're eligible for an HSA if you participate in a HDHP and don’t have any disqualifying exceptions. In any given fiscal year, a HDHP is considered a health insurance plan with a deductible that falls within a certain range. The range is set by the Internal Revenue Service. The 2019 guidelines for HDHPs are:
|Individual Coverage||Family Coverage|
|Minimum Annual Deductible||$1,350||$2,700|
|Maximum Deductible & Out-of-Pocket Expenses||$6,750||$13,500|
If your deductible falls within this range, you are generally eligible to participate in an HSA. However, a few exclusions apply that preclude you from opening an account.
You have additional health insurance such as Medicare or a spouse’s health plan (not including dental coverage, vision care or other auxiliary health plans).
You have received U.S. Department of Veterans Affairs or Indian Health Service benefits within the past three months.
You are covered by your or someone else’s FSA.
You are claimed as a dependent on someone else’s tax return.
If any of these exclusions apply, you aren’t eligible to participate in an HSA under current law.
Need health insurance? We can help you determine if you qualify for a special enrollment period on the state and federal exchanges.
How to choose a HSA
If you’re eligible for an HSA, the next step is to choose one. Banks, credit unions, insurance companies and other entities can all act as HSA administrators. An HSA administrator is essentially a provider that offers and manages health savings accounts.
Some employers and the insurance companies they’re working with jointly provide HSAs, so you could simply open an account when you sign up for a health care plan through work. However, you are completely free to compare plans across multiple HSA administrators and choose the one that’s best for you. Here are some ways to compare HSAs:
Define your goals. You can use your HSA simply to cover the cost of medical expenses, lower your taxable income and accrue tax-deferred or tax-exempt interest. However, some HSA plans let you invest your funds in stocks, bonds and other funds to potentially grow your tax-free contributions on a larger scale. Depending on your long-term plans, you may want to choose an investment HSA account to save for future medical costs or even retirement expenses. (Learn how to invest the funds in an HSA.)
Consider convenience. A good HSA will let you easily contribute and withdraw funds the way you want. For example, some HSAs provide debit cards you can use at the pharmacy or doctor’s office.
Evaluate the costs. Make sure to evaluate annual or monthly fees, which differ between banks. Some plans may have different fees depending on your account balance and if you invest your funds. Some HSA providers may also require a minimum balance before you can invest.
Common HSA fine print to compare
Monthly account maintenance fee
Minimum account balance
Investment fees, which are sometimes a flat monthly charge or a small percentage of the invested balance
Trading fees, if you’re opting for an investment HSA
Investment options and/or investment cap
If evaluating different HSA options is too overwhelming, enlist some help.
“If you're having trouble finding an HSA policy, call Healthcare.gov or a local health insurance agent,” Medcalf says. “Most agents know of the HSA policies offered in their state and can help you find the right one.”
How to sign up for an HSA
You can set up HSAs with banks, credit unions, insurance agents, financial brokers or a company connected with your health insurance provider. How you set up your plan depends on the plan itself.
Most plans can be set up in person, by mail, over the phone or online. You’ll need a form of identification, the details of your HDHP and basic personal information to set up your account. If you’re setting up an investment account, you may need to review investment options at this time. You should also be prepared to contribute, especially if you select an account with a minimum balance.
HSA contribution methods
Most HSAs allow you to contribute funds to your account throughout the course of the year in a number of ways:
Automatic payroll deductions: Set up your HSA contributions to deduct directly from your paycheck.
Automatic bank transfers: Set up your bank account to automatically contribute to your HSA on a recurring basis.
Checks, money orders or bank transfers: Send a check or money order or transfer funds from your bank account whenever you want.
Some employers contribute to their employees’ HSAs, so take advantage of that benefit if it’s available. And remember, anyone can contribute to your HSA: friends, relatives and well-wishers alike.
Lastly, if you have an individual retirement account (IRA), the IRS allows a one-time rollover of funds from your IRA to your HSA up to the maximum annual contribution limit.
HSA contribution limits
The Internal Revenue Service limits how much you can contribute to an HSA every year. The 2019 health saving account contribution maximums — up slightly from 2018 — are:
|Participants under 55||$3,500||$7,000|
|Participants 55 & over||$4,500||$8,000|
Notice that, if you’re over 55, you get an additional $1,000 as a “catch-up” contribution.
HSA contribution strategies
If you can afford it, the best strategy is to contribute the maximum allowable amount, per IRS guidelines. So for tax year 2019, individuals should aim to contribute $3,500 to their HSA, while families should contribute $7,000. That way, you get the maximum tax benefit. Even if you don’t spend all your contributions for the year, you can use them in the future or invest them for long-term growth.
If you can’t meet the max, try to contribute the amount of your deductible each year so you can use the tax-free contributions to cover out-of-pocket health care costs until your HDHP coverage kicks in.
Although it takes careful planning (and you can’t always anticipate emergencies), you can wait until you need health care or medical supplies and fund your account — so long as you allow enough time for the funds to clear before you visit the doctor or make a purchase.
“One popular account that many of my customers use allows the account holder to transfer money online from their personal account into their HSA,” Medcalf said. “Then they can use the newly deposited HSA money with their debit card, typically within 24 hours.”
Using your HSA
Like all health insurance and personal finance tools, there are a few wrinkles to HSAs that you need to remember.
- Any contributions you make that aren’t deducted from your paycheck aren’t pre-tax, but they are tax-deductible. Using form 1099-SA, you will have to declare those HSA contributions at tax time to get credit for them. Your HSA administrator should provide you, usually via mail, with a statement at the end of the year to use for your tax returns. When you file your taxes, eligible contributions will be deducted from your taxable income.
- Although you can use your HSA for products and services, such as over-the-counter medical supplies and massages, you may need to get a Letter Of Medical Necessity (LOMN) from a doctor to prove it’s an eligible expense. The list of HSA-eligible expenses is long (see the IRS guide below), so check your HSA benefits and determine which expenses may need verification from a doctor. Make sure to save all your receipts as well.
- Once you turn 65, you can still make tax-free withdrawals for eligible medical expenses or you can make penalty-free withdrawals from your HSA for any reason. You still have to pay taxes on the funds, but you can use them to supplement your income, take a trip or buy a hot tub. Note: The ability to use the funds for non-medical expenses at age 65 is why many people use HSAs as a de facto supplemental retirement account.
- If you do withdraw your funds for a non-qualifying expense before you turn 65, you will have to pay taxes on the withdrawals and a penalty that is currently set at 10%.
Learn five ways to save more for retirement in five minutes or less.
The IRS has a publication devoted to HSAs and other tax-favored health plans.
The agency also has a comprehensive list of qualified medical expenses, but, again, check with your HSA administrator so you know exactly what’s covered and what documentation it might need regarding the withdrawal or purchase.
If you have an FSA, not an HSA, through your employer, Healthcare.gov has a good primer on its basics.
If you are struggling to pay for health insurance or can’t enroll for a new plan until Obamacare open enrollment, we’ve got some short-term health insurance alternatives you can explore.