HSA (Health Saving Account) is a tax-advantaged member-owned accounts that let you save pre-tax dollars for future qualified medical expenses. You can invest HSAs—and funds never expire.
Key Notes
- To qualify for an HSA, you need have a high-deductible health plan. High deductible plan cost you less in terms of insurance premium.
- Unlike a Flexible Spending Account, your HSA money is yours forever, and it is portable. HSAs have no use-it-or-lose-it provision
- You can contribute to an HSA until you enroll in Medicare, even when you are not working.
- Invest your HSA money; do not just leave it in a savings account.
- Keep receipts for unreimbursed medical expenses since you got your HSA. You can use them to get tax-free funds from your account.
Who is eligible for HSA account?
If your medical insurance plan is
- High-deductible health plan (HDHP) or,
- Consumer-choice health plan
How much you can contribute to HSA account?
- For financial year 2020, the maximum contribution amounts are $3,550 for individuals and $7,100 for family coverage. If you are 55 or older, you can add up to $1,000 more as a catch-up contribution. Click here to see the limits.
- For financial year 2021, the maximum contribution amounts are $3,600 for individuals and $7,200 for family coverage. If you are 55 or older, you can add up to $1,000 more as a catch-up contribution. Click here to see the limits.
How you can contribute?
- Your contributions to an HSA can be made via payroll deductions or you can fund it.
- HSA contribution is deducted for Adjusted Gross Income (AGI).
- You can contribute up to the maximum regardless of your income, and your entire contribution is tax-deductible. You can even contribute to years when you have no income.
- Any contributions by your employer not counted as part of your taxable income.
- Any interest, dividends, or capital gains you earn are nontaxable.
- If your HSA investment is giving good return, then you can defer medical expenses reimbursement to later years to keep getting high return on investment. HSA account does not require you reimburse medical expenses in the year that you spent. You can ask for reimbursement, whenever you want.
How you can use HSA contribution?
- Withdrawals for qualified medical expenses are tax-free.
- Unlike a 401(k) or IRA, an HSA does not require the accountholder to begin withdrawing funds at a certain age.
- HSA account can remain untouched as long as you like, although you are no longer allowed to contribute once you start contributing to Medicare.
- Once you become eligible for Medicare at age 65 and will be automatically enrolled in Parts A and B. You cannot contribute to HSA account, once you attain Medicare age.
- If you spend HSA money other than qualified medical expenses before you are 65, you will pay a 20% penalty and you will also pay income tax on those funds.
- After age 65, you will not owe the 20% penalty. Using HSA assets for purposes other than qualified medical expenses is generally less detrimental to your finances once you’ve reached retirement age because you may be in a lower tax bracket if you’ve stopped working, reduced your hours, or changed jobs.
How to get best out of HSA account?
- Withdrawals for qualified medical expenses are tax-free.
- Invest your HSA fund wisely like other retirement account to maximize investment return. Choose an investment strategy which will fit your risk profile, diversification and required growth.
- When you open your HSA, you will be asked to designate a beneficiary to whom any funds still in the account should go upon your death. If you are married, the best person to choose is your spouse because they can inherit the balance tax-free.
What are qualified medical expenses?
Few examples of qualified medical expenses are
- Office-visit co-payments
- Health insurance deductibles
- Dental expenses
- Vision care (eye exams and eyeglasses)
- Prescription drugs and insulin
- Medicare premiums
- A portion of the premiums for a tax-qualified long-term care insurance policy
- Hearing aids
- Hospital and physical therapy bills
- Wheelchairs and walkers
- X-rays
- You can also use your HSA balance to pay for in-home nursing care, retirement community fees for lifetime care, long-term care services, nursing home fees, and meals and lodging that are necessary while obtaining medical care away from home.
Can I claim medical expenses incurred outside of USA?
You can use your HSA to pay / reimburse eligible medical expenses incurred in foreign country. To expand it further, for example, you visited a foreign country for medical treatment, you can use your HSA any prescribed drug you purchase and other expenses such as transportation, lodging etc.
Most states follow the federal tax law when it comes to HSAs, but yours may not.
As of February 2020;
- HSA contributions are taxed by California and New Jersey.
- These states do not have state income taxes, so the state tax benefit is not applicable: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
- HSA earnings are taxed (e.g., investment gains, interest earned), but not HSA contributions: New Hampshire and Tennessee.
The taxation of these plans could change in the future at either the state or federal levels.
Do you know the reporting requirement of Health Saving Account?
What is the deadline for HSA contribution?
The deadline to make contributions to an HSA for a tax year is typically April 15 of the following year. This means that for 2020 taxes, you can contribute until April 15, 2021. If you haven’t maximized your HSA contributions yet, consider using the extra time to do so and to get as big a tax break as possible.
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