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Information about all aspects of finances affected by a serious health condition. Includes income sources such as work, investments, and private and government disability programs, and expenses such as medical bills, and how to deal with financial problems.
Information about all aspects of health care from choosing a doctor and treatment, staying safe in a hospital, to end of life care. Includes how to obtain, choose and maximize health insurance policies.
Answers to your practical questions such as how to travel safely despite your health condition, how to avoid getting infected by a pet, and what to say or not say to an insurance company.

Summary

An HSA is a tax-exempt account to help fund the deductible portion of a health insurance policy with a high deductible. HSAs provide the following four tax breaks.

  • There is no income tax on your contribution.
  • An employer can make a contribution which is not counted as income.
  • The money in an HSA grows tax-deferred so no tax is payable while the money remains in the account.
  • The funds can be withdrawn tax-free if they are used for qualified medical purposes.

Contrary to conventional wisdom, HSAs work for people with a serious health condition or history.

HSAs can be used by people under age 65 who are self employed people or who are employees of any size employer. An employer can make a contribution which is not counted as income. You can withdraw from the HSA tax-free for medical expenses at any age

 In order to be eligible to take advantage of an HSA:

  • You must be under age 65 and not have Medicare.
  • You must have a High Deductible Health Plan (HDHP) In 2016, the health insurance deductible must be at least $1,300 for individual coverage or $2,600 for family coverage 
  • The policy must make everything subject to the same deductible (other than preventive care which must be covered by all health plans without any deductible or cost sharing). For example, policies with a separate deductible for medications are not acceptable.
  • You do not have any other health plan that is not an HDHP.
  • To learn more, see: Eligibility Requirements To Establish An HSA

You, the employee, own and control the HSA. Contributions must be in cash except permitted rollovers from other accounts. To learn more, see: Contributions To An HSA.

You can invest in an HSA in 2019 up to the following amounts (including money your employer may contribute to your HSA):

  • For individuals: $3,500 
  • For families: $7,000
  • If you had an HSA-eligible policy for only the first few months of the year, your contirubiton limit is based on the number of months that you had the policy. However, if you had the policy on December 1 of the year, you can make the full year's contribution if you keep the HSA-eligible policy for all of the next year. If you don't keep the policy for the full year, there is a penalty to pay.

Contributions can be made into an acount until the tax-filing deadline for the particular year - usually April 15 of the following year.

Withdrawal of money from an HSA

  • Medical expenses: Money from an HSA can be withdrawn tax-free to pay routine medical bills such as doctor visits or prescription drugs of your choice - including moneys due as part of your deductible or co-payments.(For information about medical expenses for HSA purposes, click here.) 
  • Non-medical expenses: You can also take distributions to pay for non-medical expenses. However, distributions for non-medical expenses are subject to income tax. In addition, if you are younger than age 65, there is a 20% penalty on any non-qualified withdrawal. After age 65, the withdrawal is subject to income tax, but not to a penalty.

Most HSA plans include a debit card and an online bill-payment option.

The assets in which money in an HSA can be invested are limited.

The money in an HSA does not have to be spent by the end of the year. Balances at the end of the year can be carried over into the next year (unlike flexible spending accounts).  

You can keep the account whether you change jobs or move or become disabled.

What happens to an HSA on demise of the account holder depends on who the beneficiary is.

HSAs are generally available through employers as a health benefit. HSAs can also be purchased directly from an insurer if you are self-employed or your employer doesn't offer health benefits.

No permission is required from the IRS to set up an HSA. All contributions, distributions, and return of excess contributions are reported to the IRS.

You can have both an HSA and another tax advantaged account known as an FSA (Flexible Savings Account).

There are separate rules for married people and different rules about other types of tax advantaged health plans. (To learn more, see: HSAs: Married People).

If you lose your job:

  • Money in an HSA is yours, even after you leave your job.
  • You can transfer money in an HSA to another HSA administrator without having to pay a tax. To locate an HSA with the least amount of fees, you can compare accounts at hsasearch.com offsite link
  • The money can be used tax-free for future medical expenses in any year - even if you no longer have a high-deductible health insurance policy.
  • Before you can make new contributions, you must have a high-deductible health insurance policy. It doesn't matter whether the policy continues from your former employer thanks to COBRA or if you have another policy.  (The account can continue to grow even if you cannot make new contributions).

When opening an HSA, it is advisable to look around - including looking for a custodian or trustee that does not charge for taking care of the account.

There are tips for maximizing use of an HSA. For instance, if you can afford it, use money that is not in the HSA to pay expenses not paid for by your HDHP.

For additional information about HSAs, see: 

NOTE:

  • While you do not send back-up with your tax return, it is your obligation to keep records to show the following: 
    • The funds you withdrew from the HSA were used to reimburse or pay for qualified medical expenses.
    • The expenses had not previously been paid or reimbursed by another source.
    • The expenses were not taken as an itemized deduction in any year.
  • Surveys indicate that people with a high-deductible health plan often choose not to seek medical care for minor ailments. Keep in mind that small health problems left untreated can become big problems. They can also affect treatment for your health condition.

"Medical expenses" For Purposes Of An HSA

The key to whether an expense is a "medical expense" for HSA purposes is whether an expense is for “medical care.” It also depends on who incurs the expense.

Medical Expenses

To be an expense for medical care, the expense has to be primarily for the diagnosis, cure, mitigation, treatment, prevention or alleviation of a physical or mental defect or illness. The determination often hangs on the word “primarily,” which depends on all the relevant facts and circumstances. 

As a general matter, the following distributions are for medical care for HSA purposes:

  • Medical expenses that are not reimbursed by your High Deductible Health Insurance Plan (HDHP.)
  • The cost of meals and lodging at a hospital or similar institution if a principal reason for being there is to receive medical care. 
  • Amounts paid for qualified long-term care services. 
  • A portion of the premiums paid for qualified long-term care insurance contracts.
  • Over the counter drugs if you have a prescription from a doctor.
  • The money that Social Security withholds from your benefits to pay for Mediare Part B.
  • The money used to pay Medicare Part D or Medicare Advantage premiums - but not medigap premiums.

The following distributions are generally not considered to be for medical care:

  • Membership in an athletic club or gym.
  • Funeral expenses.
  • The cost of diet foods or beverages.
  • Over the counter drugs unless you have a doctor's prescription.

There are special rules for insurance premiums. Generally, you cannot treat insurance premiums as medical expenses for HSA purposes. However, you can treat the following premiums as qualified HSA medical expenses: 

  • Long-term care coverage (subject to limits based on age. The limits are adjusted annually.)
  • Health care coverage while you receive unemployment benefits
  • Health care continuation coverage required under any federal law
  • If you are age 65 or older, you can treat insurance premiums as a medical expense (other than the premiums for a Medicare supplemental policy such as Medigap)

For additional information about medical expenses for purposes of an HSA, click here.

Qualified medical expenses include those incurred by:

  • Yourself.
  • Your spouse.
  • Any dependent you claim on your tax return.
  • Any person you could have claimed as a dependent for tax purposes except that:
    • The person filed a joint return
    • The person had a gross income of $3,300 or more, or
    • You, or your spouse if filing jointly, could be claimed as a dependent on someone else's return for the year in question.

NOTE: The definition of medical expenses for income tax purposes is not necessarily the same as for HSA purposes. For a list of specific expenses which do and do not qualify for tax purposes, click here

Investments Permitted In An HSA

HSA trust assets must be kept separate and may not be commingled with your other assets.

Funds in an HSA can be invested in any investment approved for an IRA. For example:

  • Interest bearing bank accounts
  • Stocks
  • Mutual funds
  • Bonds
  • Real estate

You cannot invest in life insurance contracts.

You cannot use any portion of an HSA as security for a loan. If you do, the fair market value of the assets used as security for the loan are deemed to be income.

HSAs And Medicare

If you have Medicare, you cannot have a HSA. HOWEVER, as reported in Kiplinger's Retirement Report:  If you have a spouse who has an HSA, he or she could purchase a family plan (and contribute the maximum for a person with a spouse instead of the maximium for an individual). The policy could be used to cover:

  • Medicare co-payments 
  • Medicare Part B premiums
  • Other out-of-pocket expenses.

To learn about Medicare, click here.

What Happens To An HSA Upon The Account Holder's Death

If your spouse is the designated beneficiary: The HSA is treated as the spouse’s after your death.

If someone other than your spouse is the designated beneficiary: The account is no longer an HSA and the fair market value of the HSA is taxed to the beneficiary.

If your estate is the beneficiary: The HSA ends and the fair market value is included in your income on your final income tax return.

How To Maximize Use Of An HSA

  • According to Money Magazine, the single best HSA move you can make is to maximize your contributions every year.
  • If you can afford it, pay for medical expenses with non-HSA money. 
    • By paying with non-HSA money, you can leave the tax sheltered account untouched. Interest and investment returns accumulate tax free. They are not taxed later if you spend the money on qualified health expenses. Alternatively, if you spent your HSA money on health expenses, and saved after-tax dollars, the growth of those savings would be taxed, which reduces their overall value.
  • Don't go into expensive credit card debt to leave money in your HSA.
  • Keep the money in your HSA invested in guaranteed, fixed-rate accounts. 
    • Your health history leaves you vulnerable to ongoing medical expense. If you invest in stocks or other investments which can increase or decrease in value, you may get hit with needing money in a down turn and having to take an unnecessary loss. Even worse, if you take a financial beating, you're left with a health insurance plan that offers minimal coverage and not enough money to cover out-of-pocket expenses.
  • Look for an HSA account that doesn't have fees attached. Most plans come with fees, but not all of them.
  • Don't wait to find the ideal plan. For every month you delay opening an HSA, your maximum contribution for the year shrinks by one-twelfth. You can roll over your HSA to another company if you find a better plan later. Even if it is the last month of your tax year, you are treated as being an eligible individual for the entire tax year for purposes of computing the amount you can contribute to your HSA.
  • Read our information about maximizing use of your particular kind of health insurance. For example, if you have a Preferred Provider Organization (PPO) type policy, work the system to stay in network as much as possible. To learn more, see, Health Insurance. Also learn how to minimize what you pay when you purchase Drugs.
  • Don't give in to the temptation to avoid needed medical care just to hold onto money longer.
  • If you have both a 401(k) plan and an HSA, fund the HSA first. 
    • Both have the tax advantage of pre-tax contributions and tax free earnings. However, with an HSA, there is no tax on withdrawal for medical expense. Also, at age 65, you can use the money for non-health expenses without penalty, which is then subject to the same income tax as a 401(k).
  • Keep in mind that you can reimburse yourself for the money that Social Security withholds from your benefits to pay Medicare Part B, as well as payments for Medicare Part D and Medicare Advantage premiums.  (You cannot use the money for Medigap premiums.)  You may also make tax-free withdrawals to pay a portion of long-term-care premiums based on age.
  • The younger you are when you start an HSA, the better because you have a shot of accumulating money tax free longer.

How To Choose An HSA Administrator

Many banks and brokerage firms as well as insurance companies offer HSA accounts. You can open an account anywhere.

Most employers have relationships with specific HSA administrators. While you are not required to use an employer's plan, there may be benefits of using their plan such as streamlining the claims paying process. It may also be the only way to get an employer's contribution. 

If you shop around, consider:

  • The fees.
  • Whether an account permits the investments you want to make. Some plans offer a fixed return on money in the account. Others permit investment in a menu of mutual funds, or let you choose stocks to purchase. If you expect to use the money for current medical expenses, consider investing it in a low-cost savings account and a means that makes it easy to use the money such as a debit card.
  • How easy it is to access your money. Plans that come with checkbooks or debit cards are easier to use than those that make you file paperwork to get reimbursed. Some insurers offer the insurance policy and the Health Savings Account so you don't have to open a separate account. Other insurers offer just the insurance policy. You have to find a bank or other trustee to open your HSA.
  • The HSA does not have to be opened at the same institution that provides the HDHP.

You can shop for a plan and for companies that write HSA-eligible policies through a site such as

  • www.hsainsider.com offsite link The site has a feature that allows you to rank the characteristics you want in an account from one to five, and to be delivered a list of three companies that provide an account that matches the most important criteria selected. It's on the "Build Your Own HSA" page.
  • www.HSASearch.com. offsite link

You can get quotes for HSAs in most states through www.eHealthInsurance.com offsite link, Tel.: 800.977.8860. The company behind the site offers discounts with partners that administer HSAs. It doesn't underwrite the insurance. Instead of using the automated system on the web site, call and tell the representative about your health history. You don't have to disclose your name until you get coverage.

NOTE: You can switch to a different HSA administrator and transfer the money similar to an IRA rollover.

HSAs In Relation To Other Health Or Retirement Plans

If you have an HSA, you still can contribute to an IRA, a 401(k) and a FSA

Earnings in an HSA grow tax-free, just like a 401(k) or an IRA. Unlike them, you can dip into an HSA at any age - tax-free- to pay for medical expenses, including your deductible and co-payments and many charges that typically aren't covered by health insurance.

IRA: You can exclude from your gross income a qualified HSA funding distribution from your individual retirement account.

FSA and HSA: You cannot have both an HSA and a FSA if you use the FSA to pay health care costs with pretax dollars. However, if your FSA restricts reimbursements to wellness care (such as annual physicals) and vision and dental care, you can have both an HSA and an FSA.

You cannot double dip between the two accounts.

You can ask your employer to transfer the funds in your FSA or HRA to an HSA.

For More Information About HSAs Or To Find HSAs

See:

  • www.HSAbank.com offsite link - Helps find info and for opening a Health Savings account.
  • www.HSAfinder.com offsite link: Helps find HSAs.
  • www.HSAinsider.com offsite link: Helps find HSAs in your area. Also tells you which companies do not sell policies to individuals. It is managed by the HSA Coalition, a Washington nonprofit organization.)

IRS HSA Publication 969 can be found at: www.irs.gov/publications/p969/index.html offsite link.