HSA or health savings account can help you to reach your wealth-building goals. It is a way of growing your tax-free account and can be spent every year on medical expenses. You can use your untaxed HSA funds for copayments, coinsurance, deductibles, and expenses, which in turn reduces your healthcare costs.
With rising healthcare costs, HSA can be a silver lining that can cover a portion of this cost. On iLiveActive our services and prescription medications are covered under the health savings account.
Let us learn more about what is HSA, how it works, its advantages, eligibility criteria, contribution, and withdrawal rules.
What is HSA?
The Health Savings Account is a personal savings account with tax advantages for people covered under high-deductible health plans (HDHPs). It helps to save qualified health expenses that are beyond HDHP coverage limits. Contribution to this account is made by an individual or individual’s employee every year. HSA can help you to cover the costs of dental, vision, and over-the-counter drugs.
How does it work?
You need to contribute to HSA annually if you have HDHP coverage. Minimum deductibles are $1,400 for singles and $2,800 for families. An HDHP's total annual out-of-pocket expenses, which include deductibles, copayments, and coinsurance, will not be more than $6,900 for an individual or $13,800 for a family. In this, you are paying a portion of your claim to get 80 to 90% coverage for your medical expenses.
HSA gives you a tax advantage and helps you save your medical expenses that are generally not covered under other health plans. HSA owned by an individual can be funded by an employee or your employer and acts as a portable asset. It is an excellent choice for self-employed individuals.
Qualification Needs for HSA
You qualify for HSA if;
- You are under the coverage of high-deductible health plans (HDHPs)
- You are a taxpayer as per standard rules set by Internal Revenue Service
- You are not enrolled in Medicare
- You are not dependent for someone else’s tax return
You can make payment for HSA through cash only. Your HSA can be funded by your employer or by any person in your family. Even a self-employed person can have HSA if all the eligibility criteria mentioned above are met.
To be HSA qualified, your health plan’s annual limit on out-of-pocket expenditures for covered benefits for individual coverage must not exceed $6,900 in 2020 and $7,000 in 2021. For family, this limit must not exceed $13,800 in 2020 and $14,000 in 2021. These amounts are adjusted for inflation every year.
Benefits of HSA
The HSA not only covers your qualified medical expenses but also acts as a savings account for medical and non-medical expenses during retirement. If you are covered under HSA through your job, it gets funded from your payroll. Thus it reduces your tax per year, which in turn helps you to save. As you contribute to HSA through the pre-tax income, it reduces your tax liability.
Also, funding of your HSA is totally tax-deductible, and the interest earned is tax-free. However, if you make an excess contribution to HSA, you may incur a 6% excise tax. But, to be eligible for HSA benefits, you need to fit in all requirements of HDHP. Generally, healthy individuals with low premiums can benefit from these tax advantages.
As mentioned in Internal Revenue Bulletin: 2020-22, HSA-qualified HDHPs can cover telehealth and other remote care benefits without a deductible or with a minimum deductible (1).
On iLiveActive most of our products and services are covered under HSA. Our licensed physicians will review your request, evaluate your medical history, and prescribe suitable medications. On our site either you can use an HSA card for a purchase or you can use a debit card and submit receipts with a claim for reimbursement.
When it comes to tax advantages of HSA, the triple tax advantage is the most popular one. It includes;
- Contributions reduce the taxable income
- Earnings on your account grow tax-free
- Withdrawals done for qualified medical expenses are not taxable
You can claim your tax deduction for all the fundings made to your HSA by you or by your employer over the course. Generally, state income taxes follow federal rules for any tax deduction and exclusion.
HSA has great potential for retirement plans as the unused funds get accumulated over the years. After age 55 it allows you to add up to $1,000 to your HSA above the yearly contribution limit. When you reach Medicare eligibility at age 65, the 20% tax penalty for non-medical expenses is waived. You can also invest the HSA funds in stocks or mutual funds which can help you grow your asset.
HSA Contribution Rules
The tax-free contribution is the most attractive feature of HSA. The HSA funds can go straight from your paycheck through pretax payroll deduction.
Along with your contribution, the interest you earn on your HSA funds is tax-free. Whatever amount you contribute, your amount starts earning interest.
HSA contributions are not allowed for withdrawal during the tax year. Funds that are unused get accumulated for the following year. HSA is a portable fund, which means you can carry it with your job change. HSA can be transferred to the surviving spouse upon the death of the account holder; it will be tax-free.
HSA Withdrawal Rules
Withdrawing from HSA for medical expenses that are not covered under HDHP will not be taxed.
Such withdrawals include;
- Qualified medical expenses such as prescription drugs, vision care, dental services, etc
- Insurance premiums for 65years or older for medicare and other healthcare coverage while receiving unemployment compensation
If you withdraw HSA and make payment for reasons other than medical expenses, it will be subjected to income tax and an additional 20% tax penalty. If you are 65 years or older, you can withdraw HSA funds for any expenses. However, income tax for non-medical usage will be applied without any additional penalty.
What are HSA Eligible Services?
HSA eligible services and products need to come under “medical care,” as defined by the Internal Revenue Service (IRS) (2). Generally, it includes the amount paid for the diagnosis, mitigation, prevention, and treatment of a disease that is affecting any organ or functioning of the body.
These services include;
- Prescription medications
- Over-the-counter health products
- Dental care
- Vision care
- First aid supply
- Diagnostic health products
- Healthcare products for home
- Doctor’s co-pays and a visit to specialists
Final Words
HSAs are growing rapidly in America, helping consumers with their healthcare expenses. They are not only helpful in covering immediate and long-term medical expenses but are also providing coverage for retirement expenses. Smart investment in HSA can help you to build truly tax-free wealth with tax-deductible contributions.