The popularity of Health Savings Accounts (HSAs) has surged dramatically in recent years. According to a report by Devenir Research, there are now over 26 million health savings accounts, holding $61.7 billion in assets. But what are HSAs, and why are they so popular?
HSAs are financial accounts established by an individual or family to pay for qualified medical expenses. With an HSA, no taxes are withheld on the participant’s contributions, they may withdraw HSA funds tax-free to reimburse themselves for qualified medical expenses, and they may defer taking such reimbursements indefinitely without penalties.
HSAs have unique benefits—like “IRAs (Individual Retirement Account) on Steroids”—with triple tax advantages, including:
- Tax-deductible contributions
- Tax-free accumulation of interest and dividends tax-free
- Tax-free distributions for qualified medical expenses
Want to learn more about the differences between HRAs, HSAs, and FSAs?
Below are 10 frequently asked questions about HSAs.
1) How do I qualify for an HSA?
To open an HSA, you need a high deductible health plan (HDHP). This can be an HDHP that you purchase on your own or get through your employer’s group health insurance plan. In 2020, the IRS defined a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, copayments, and coinsurance) can’t be more than $6,900 for an individual or $13,800 for a family. (This limit doesn't apply to out-of-network services.)
In summary, to be eligible for an HSA:
- You must be covered under a high deductible health plan (HDHP)
- You have no other health coverage except what is permitted by the IRS (see IRS Publication 969)
- You are not enrolled in Medicare
2) How much can I contribute to my HSA?
Each year, the IRS adjusts the guidelines regarding HDHPs and HSA contribution limits.
For 2020, these limits are as follows:
|HSA contribution limit (company + employee)||$3,550||$7,100|
|HSA catch up contributions(age 55+)||$1,000||$1,000|
3) How can I use my HSA money?
You may spend the HSA money tax-free on out-of-pocket medical expenses, such as your deductible, copays for medical care, and prescription drugs, or bills not covered by insurance such as vision and dental care.
The IRS determines the types of medical expenses you can use tax-free with HSA funds. They are listed in IRS Publication 502.
Unlike with a flexible spending account (FSA), you don’t have to use HSA funds by the end of the year. Rather, HSA funds can grow tax-deferred in your HSA for later use.
If you use HSA funds for non-medical expenses before age 65, you are required to pay taxes on the withdrawal plus a 20% penalty.
4) How do I invest my HSA money?
HSA administrators typically offer accounts that are easy to access for medical expenses. Many HSA administrators or banks will let you shift money into mutual funds and other investments after your HSA account balance reaches a certain level. These can vary by your HSA provider.
5) Can I contribute to my HSA account after age 65?
To be able to contribute to an HSA after age 65, you must not enroll in Medicare Part A or Medicare Part B. HSA rules make a distinction between being merely “eligible” for Medicare (keep HSA eligibility) and being “entitled” to or “enrolled” in Medicare (lose HSA eligibility). You become enrolled in Medicare under Part A by filing an application or being approved automatically. The Social Security Administration automatically “enrolls” you in Medicare Part A when you begin collecting Social Security benefits. Accordingly, if you are receiving Social Security payments and are over 65, you are almost certainly enrolled in Medicare Part A. Also, employees that work for smaller employers (fewer than 20 employees) will have Medicare as their primary insurance at age 65. Some people; however, avoid enrolling in Medicare and being automatically enrolled by waiting to receive Social Security. If you are not enrolled in Medicare and are otherwise HSA eligible, you can continue to contribute to an HSA after age 65. You are also allowed to contribute the $1,000 catch-up.
6) Do the HSA tax benefits phase out at certain income levels?
No, there are no income limits with an HSA.
7) If I set up an HSA through my employer, what happens if I switch jobs?
You keep the money in your HSA after you leave a job. There is no requirement to spend it before you terminate employment.
8) How does health reform change HSAs?
The Affordable Care Act ("health reform") was signed into law in 2010 and made two changes to HSAs:
- In 2011, over-the-counter medications were no longer eligible for tax-free withdrawal unless obtained with a prescription (except for insulin).
- In 2011, the excise tax for non-qualified HSA withdrawals increased from 10% to 20%.
The CARES act, which passed March 27, 2020 restored the ability to use HSAs to purchase certain OTC drugs and medications, like aspirin and other pain medications, allergy medication, etc., without a doctor's prescription.
To learn more about changes to HSAs under the CARES act, read our article: The CARES Act effect on HRAs, HSAs, and FSAs,
To learn more about changes to HSAs under Health Reform, read our article: HRA, HSA and FSA - Changes Under Health Reform.
9) Can you have an HSA and an HRA at the same time?
Yes, as long as your HRA is "HSA-qualified." There are many ways to adjust HRAs to make them HSA qualified, but the simplest and most straightforward is what we call a "limited purpose HRA."
In years where you want to contribute to HSA, you can only use your HRA to reimburse the following five expenses:
- Health insurance premiums
- Wellness/preventive care (e.g. checkups, mammograms, smoking cessation, weight loss)
- Dental expenses
- Vision expenses
- Long-term care premiums
Once the HSA deductible is met, the HRA can reimburse all qualified medical expenses.
To learn more, read our article: FAQ: Can I have an HRA and an HSA at the same time?
10) What is the difference between an HRA, HSA, and FSA?
HRA = Health Reimbursement Arrangement. An IRS-approved, employer-funded, tax-advantaged health benefit used to reimburse employees for out-of-pocket medical expenses and personal health insurance premiums.
HSA= Health Savings Account. A savings account used in conjunction with a high-deductible health insurance policy that allows users to save money tax-free against medical expenses.
FSA = Flexible Spending Account. A Flexible Spending Account (also known as a flexible spending arrangement) is a special account you put money into that you use to pay for certain out-of-pocket health care costs.
Download our comparison chart for information
What questions do you have about HSAs? Let us know in the comments and we'll answer them.