What is a Health Savings Account (HSA)?
How does an HSA work?
What happens to an HSA if an individual quits their job or otherwise leaves an employer?
What does it mean to have an HSA checking account FDIC-insured?
What health care expenses does an HSA cover?
What happens to an individual’s HSA if they become disabled?
What happens to the money in an HSA after an individual reaches age 65?
A Health Savings Account (HSA) is a special tax-advantaged savings account similar to a traditional Individual Retirement Account (IRA) but designated specifically for paying for medical expenses. An HSA allows individuals to pay for current qualified health care expenses and save for future qualified medical and retiree health care expenses on a tax-favored basis.
HSAs provide triple-tax advantages: contributions, investment earnings, and qualified distributions all are exempt from federal income tax, FICA (Social Security and Medicare) tax, and state income taxes (for most states).
Unused HSA dollars roll over from year to year, making HSAs a convenient and easy way for individuals to save for future medical expenses. HSAs are individually-owned accounts, so account holders can take their HSA with them when they change medical plans, change jobs, or retire. This means the funds in the account are non-forfeitable and portable.
Funds in the account not needed for near-term expenses may be invested, providing the opportunity for funds to grow. Investment options include money market accounts, mutual funds, etc.
In order to be eligible to contribute to an HSA, an individual must be covered by a qualified High-Deductible Health Plan (HDHP) and have no other “first-dollar” coverage. An individual may use an HSA to help pay for medical expenses covered under an HDHP as well as to pay for other common qualified medical expenses. Unused HSA funds can remain in an individual’s account for use in future years, and can be invested in a choice of investment options, providing the opportunity for funds to grow.
The money deposited into an HSA account, either by an individual or their employer, is 100 percent tax-deductible up to the maximum annual contribution limit for federal income tax, FICA (Social Security and Medicare) tax, and in most states, state income tax. For the 2009 tax year, the maximum contribution is $3,000 for individuals and $5,950 for a family.
Individuals can use these tax-free dollars to pay for expenses covered under an HDHP until their deductible has been met. The insurance company pays covered medical expenses above the deductible, except for any coinsurance; individuals can pay coinsurance costs with tax-free money from their HSA. In addition, individuals can use tax-free HSA dollars for qualified medical expenses not covered by the HDHP, such as dental, vision, and alternative medicines.
The funds in an HSA can be used for other, non-medical expenses, but the dollars are subject to ordinary tax plus a 10 percent penalty if the individual is under age 65. The 10 percent penalty does not apply if the distribution occurs after an individual reaches age 65, becomes disabled, or dies; however, ordinary income tax may still apply.
Funds remaining in an HSA at year-end are rolled over for future health care expenses. Individuals may choose not to spend HSA dollars on small expenses, instead using after-tax dollars to meet these expenses and leaving HSA dollars in an investment account to grow for future needs. Choosing the expenses on which to spend HSA dollars and which to pay out-of-pocket with after-tax dollars is entirely up to the individual.
An HSA is portable. This means that individuals can take their HSA with them when they leave, and can continue to use the funds that remain. Funds left in an HSA continue to grow tax-free. If an individual is later covered by a qualified HDHP, they can resume making contributions to their HSA.
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government. The FDIC protects an account owner’s deposits in the unlikely event of the failure of the insured bank or savings institution.
FDIC deposit insurance covers the balance of each depositor’s account, dollar-for-dollar, up to the insurance limit, including principal and any accrued interest through the date of the insured bank’s closing.
The custodian of the ACS|BNY Mellon HSA Solution is The Bank of New York Mellon (BNY Mellon). Deposits to an HSA checking account are FDIC-insured up to the FDIC coverage limit. The FDIC does not insure the money invested through the investment component of the ACS|BNY Mellon HSA Solution.
An individual’s HSA funds can be used tax-free to pay for out-of-pocket qualified medical expenses, even if the expenses are not covered by a HDHP. This includes expenses incurred by any member of the family (for those with family coverage).
There are hundreds of qualified medical expenses, including over-the-counter medications, dental visits, orthodontics, glasses, long-term care insurance premiums, cost of COBRA coverage, medical insurance premiums while receiving federal or state unemployment compensation, and post age-65 premiums for coverage other than Medigap or Medicare supplemental plans. In addition, HSA funds may be used to pay Medicare Parts A and B premiums and employer-sponsored retiree plans. Refer to IRS Publication 502 for a more complete list of qualified medical expenses.
All of these expenses may be paid for using HSA funds and are free from federal tax and state tax (for most states).
If an individual becomes disabled and enrolls in Medicare, contributions to an HSA must stop as of the first of the month in which the individual enrolled. However, an individual can use HSA funds to pay Medicare Part A and/or B premiums. Payment of these Medicare premiums is considered to be a qualified medical expense.
Distributions from an HSA used for non-qualified expenses will be subject to ordinary income tax but are exempt from the 10 percent penalty.
Upon reaching age 65, HSA funds continue to be available without federal taxes or state tax (for most states) for qualified medical expenses. For example, an individual may use an HSA to pay certain insurance premiums, such as Medicare Parts A and B, Medicare HMO, or a share of retiree medical coverage offered by a former employer. However, funds cannot be used tax-free to purchase Medigap or Medicare supplemental policies.
If an individual uses HSA funds for qualified medical expenses, the distributions from the account remain tax-free. If an individual uses the monies for non-qualified expenses, the distribution becomes taxable, but is exempt from the 10 percent penalty.
When an individual reaches age 65 or becomes disabled, they may still contribute to an HSA if they have not enrolled in Medicare. Upon enrollment in Medicare, an individual is no longer eligible to contribute to an HSA.