Using a Health Savings Account: Benefits, Eligibility & How to Use

Introduction

A health savings account (HSA) is an individual savings account that allows individuals to save for medical expenses on a tax-advantaged basis. HSAs are commonly used by individuals with high-deductible health plans, as they provide additional funds to cover medical expenses not covered by insurance. This article will explore the purpose of an HSA, eligibility requirements, the benefits of using one, how to open and fund an HSA, and how to use funds from an HSA.

What is a Health Savings Account?

A health savings account (HSA) is a type of savings account designed specifically for medical expenses. It is an individual account owned by the account holder, who can make contributions on a pre-tax or tax-deductible basis. Funds in the account accumulate over time and can be used to pay for qualified medical expenses such as doctor visits, prescription drugs, and other healthcare costs. The funds in the account are not subject to federal income tax at the time of deposit. In addition, any earnings on the funds in the account are tax-free.

In order to be eligible for an HSA, an individual must have a high-deductible health plan (HDHP). An HDHP has a higher deductible than most traditional health plans and offers lower premiums. In 2020, the minimum deductible for an HDHP was $1,400 for an individual and $2,800 for a family. Individuals must also meet certain other criteria to be eligible for an HSA, including not being enrolled in Medicare and not being claimed as a dependent on someone else’s tax return.

Benefits of Using a Health Savings Account

There are several benefits to using a health savings account. One of the main benefits is the tax advantages associated with HSAs. Contributions to HSAs are tax-deductible, meaning they reduce the amount of taxable income an individual has to report on their taxes. Additionally, any earnings on the funds in the HSA are tax-free. Lastly, withdrawals used to pay for qualified medical expenses are also tax-free.

Another benefit of using an HSA is the flexibility it provides. Funds in an HSA can be used to pay for qualified medical expenses at any time, without having to wait for the end of the year or for IRS approval. This makes it easier for individuals to manage their medical expenses throughout the year. Additionally, HSA funds do not expire, so individuals can keep their funds in the account until they need them.

How to Open and Fund a Health Savings Account

Opening and funding an HSA is relatively simple. First, individuals will need to find a financial institution that offers HSAs. There are many different options available, from banks to online providers. Once an individual has chosen a provider, they will need to fill out an application and provide the necessary information. After the application is approved, the individual will be able to start making contributions to the account.

Contributions to an HSA can come from the account holder, an employer, or both. The maximum contribution limit for 2020 was $3,550 for an individual and $7,100 for a family. Contributions can be made on a pre-tax basis through payroll deductions, or on a post-tax basis with after-tax dollars. Additionally, individuals aged 55 or older can make an additional catch-up contribution of up to $1,000 per year.

Using Funds from a Health Savings Account

Funds in an HSA can be used to pay for qualified medical expenses, including doctor visits, prescription drugs, and other healthcare costs. Qualified medical expenses are those that are considered medically necessary and are typically prescribed by a physician. Additionally, funds in an HSA can be used to pay for dental and vision care, long-term care insurance, and some over-the-counter medications. Funds in an HSA cannot be used to pay for cosmetic procedures or non-medical items such as gym memberships.

Rules for withdrawing funds from an HSA vary depending on the provider. Some providers require individuals to submit receipts for medical expenses before reimbursing them for the expenses. Others may allow individuals to withdraw funds without submitting receipts, but the funds must still be used for qualified medical expenses. Additionally, some providers may charge fees for certain types of transactions, such as withdrawals or transfers.

Conclusion

Health savings accounts are a great way to save for medical expenses on a tax-advantaged basis. They offer tax advantages, flexible spending options, and the ability to pay for qualified medical expenses at any time. Before opening an HSA, individuals should consider their eligibility requirements and the rules and fees associated with their chosen provider. With careful planning and budgeting, an HSA can be a great tool to help individuals save for medical expenses.