The ABCs of HSAs
Learn about these amazing accounts
If I could give an award to any one account type it would be the Health Savings Account. Contributions are made pre-tax (or reduce your taxable income when you file your tax return if you have non-employer-sponsored account), the money grows tax-deferred, and if you use the money for qualified medical expenses, you pay 0 tax on the gains.
Even for the (now) young and healthy, HSAs can be a lifesaver. While employed by a major company, I had relatively inexpensive health insurance, dental and vision premiums. I had never had a major illness in the past and figured I wouldn’t need to tap into the money for awhile, but I put aside some money in my HSA for a rainy day. Over the past few months between quitting my job and starting my firm, I had to purchase a separate health insurance policy. The monthly premiums and the out-of-pocket limit are 5x the amount of my old policy. I couldn’t use the funds in my HSA to pay for the premiums, but I knew I’d be able to use the account to cover any co-pays, my semi-annual dental exams and for any other unexpected health, dental or vision-related costs.
Lo and behold, for the first time in my life I had a major medical scare, ended up purchasing glasses that were not fully covered by my vision insurance, and had to have dental work done. Each time I was able to use my HSA funds (that I had contributed pre-tax) to cover the costs I’d have had to pay out of pocket anyway.
Adjustment for AGI
Reduce your taxable income in the year of contribution
Grow your money tax-deferred
If used for qualified medical expenses
How to get an Hsa
So how to get an HSA account? The easiest way is to enroll in the HSA when you sign up for insurance coverage. However, if your insurance company does not give you the option, or if you want more flexibility in your options, you can enroll in an HSA on your own as long as you meet certain criteria:
- Must be enrolled in a high-deductible health plan (HDHP)
- Must not have any other health insurance coverage
- Must not be able to be claimed as a dependent on another taxpayer’s return (whether actually claimed or not)
- Must not be enrolled in Medicare (but can enroll in an HSA prior to obtaining Medicare coverage)
How to Contribute to your hsa
Once your HSA is set up, you can start contributing money. If your plan is employer-sponsored, the easiest way to do so is through payroll deductions. Since this money is coming out pre-tax, the wages shown on your W2 have already been reduced so you don’t need to make any adjustments to get credit when you file your taxes.
If you have a non-employer sponsored plan, you can make contributions manually, or set up a recurring auto-draft from your bank account for convenience. Since this money has already been taxed before being moved to the HSA, you will need to make an entry on your 1040 when you file your taxes for the year to take advantage of the tax benefit.
How to uSE YOUR HSA
Once your HSA is funded you can start using it for qualified medical expenses. These include copays, purchase of prescription drugs (or over-the-counter drugs prescribed by a doctor), vision exam and glasses, dental expenses, medical equipment, etc.
You can even use your HSA for certain insurance premiums:
- Long-term care insurance
- Health continuation coverage such as COBRA
- Medical insurance premiums only while receiving unemployment compensation
- Medicare premiums (but not Medigap or other supplemental coverage)
Many HSAs now come with a debit card you can swipe when making a purchase. Most have built in safeguards to prevent you from making unauthorized purchases, but it is important to double check that you haven’t accidentally used your HSA funds for anything else, as any use for non-qualified expenses is taxed as regular income (if it was contributed pre-tax) and subject to a 20% penalty unless you are 65 or older.
Alternatively, you can request a reimbursement from your plan. Some administrators require you to submit proof such as a receipt or information on the provider and care received, but again, it is your responsibility to make sure you haven’t reimbursed yourself for a non-qualified expense.
It is important to note that any expenses incurred before your HSA account was created are not eligible to be reimbursed. However, you can still itemize these costs (and any others that haven’t been paid using insurance or pre-tax funds) on your Schedule A.