For calendar-year plans, we’re almost halfway through the plan year. It’s a great time to review ten important things to know (and remember) about HSAs.
HSA account holders save on taxes three different ways. First, contributions to the account are not taxed. Second, interest earned on the balance is tax-free. And finally, withdrawals for qualified medical expenses are not taxed. When it comes to HSAs and taxes, three times are a charm.
HSA Ownership and Portability
HSAs are owned by the individual, unlike Flexible Spending Accounts (FSA) and Health Reimbursement Arrangements (HRA) which are owned by the sponsoring employer. You make all the decisions on how and when to fund, spend the money, earn interest, and invest. HSAs are also portable. You maintain ownership of the account and the account balance if employment changes, even if your employer has contributed to the account.
Any balance in your HSA at the end of the plan year automatically rolls over to the following year. The account continues to grow for later use. There is never a risk of “use it or lose it.”
Most HSA providers offer investment options once the account exceeds a certain minimum balance threshold (ranging from $1,000 to $2,500, depending on the provider). Investing can help account balances grow much more quickly.
HSA account owners can change how much they are contributing at any time. For example, if you begin the plan year by contributing $250 a month but in August determine that you need to cut back to $100 a month, that’s allowed by the IRS. Not so for an FSA, for which contributions must stay the same for the entire plan year.
Another unique feature of HSAs is that account owners can be reimbursed for an expense long after it was incurred if they had an open HSA at the time the expense happened. For example, if you made a trip to the ER in January 2014, you can file for reimbursement at any later date – such as right now, in 2017 – as long as your HSA was established prior to January 2014.
COBRA and Medicare Premiums
Insurance premiums are not generally an eligible HSA expense, with two notable exceptions. HSAs can be used to pay the cost of COBRA premiums for account owners who experience a qualifying event (such as divorce or job loss). Also, account owners aged 65 and up can use their HSA to pay for Medicare Part B, Part D, and Medicare Advantage (Medicare HMO) premiums (but not Medigap premiums).
Changing Insurance Coverage
You must be covered by a High Deductible Health Plan (HDHP) to open an HSA account. Once the HSA is established, however, you own the account. If you then switch to different, non-HDHP coverage, your remaining HSA account funds can be used cover eligible medical expenses that occur under the new plan. However, you cannot make further account contributions until again covered under a qualifying HDHP.
HSA account owners can contribute up to $1,000 above the regular annual contribution limit starting at the beginning of the plan year in which they turn 55. This is known as a ‘catch-up’ contribution and helps older account holders grow their balances more quickly prior to retirement.
After age 65, HSA account owners can make withdrawals for non-medical expenses without penalty. Such withdrawals are taxed as regular income.