The ABCs of Health Savings Accounts (HSAs)
Is your employer introducing a health savings account (HSA) as an option for your group insurance plan but you are unsure as to whether it is a viable option for you and/or your family? Or are you self-employed looking for an affordable medical plan? We can help. Take a moment to familiarize yourself with the basics of health savings accounts.
The Basics of HSAs
If you have a health savings account (HSA), you also have a high deductible health plan (HDHP), since the two plans work together. The HSA is like a personal savings account set aside to pay for eligible health care expenses that the HDHP doesn't pay for. When you receive medical care, you pay for it first from your HSA, before other resources are used. Once your eligible expenses reach the deductible, your HDHP begins to pay its share of costs. So you use your HSA for items your plan doesn't pay for: expenses before you meet the deductible, you share of coinsurance, and expenses that your plan does not cover, such as eyeglasses.
You fund your HSA by making pre-tax contributions, reducing your taxable income right off the bat. Your employer may contribute as well. You can generally access your HSA funds using a debit card or special checkbook.
Unlike a flexible spending account (FSA), money left in your HSA at the end of the year carries forward to the next year. There are other advantages too: your account earns interest, and the earnings accumulate tax-free. If your employer contributes to your HSA, you aren't taxed on employer contributions made for you.
Check your eligibility
To be eligible to contribute to an HSA, you must have a qualifying HDHP. For each tax year the government sets the limits for what qualifies as an HDHP. The requirements include the minimum deductible for the plan, as well as the maximum out-of-pocket amount the plan can require you to pay.
There are other limits on your eligibility for an HSA:
- You cannot be enrolled in Medicare (generally, you are less than age 65)
- You cannot be eligible to be claimed as a dependent on another person's tax return
- You cannot have other disqualifying insurance
Disqualifying insurance includes coverage under another health plan that does not qualify as an HDHP. For example, even if your primary medical plan is an HDHP, if you are also covered under your spouse's PPO medical plan (which is not a qualified HDHP), you would not qualify to contribute to an HSA. However, some other types of insurance are acceptable. For example if you have separate dental, vision or preventive care benefits, or a separate hospitalization plan, you may still be eligible to contribute to an HSA.
Figure out your eligible expenses
To be considered an eligible expense, your bill must not be reimbursed elsewhere, such as through a group health plan covering you or your spouse. It must also be considered a qualified expense. While braces and eyeglasses are perfect uses for HSAs under the rules, cosmetic surgery or vitamins to maintain your good health generally don't qualify. Other examples of eligible expenses include copays, coinsurance or deductibles you pay under your HDHP.
Before you enroll, estimate what your annual unreimbursed health care expenses might be. The good news is that you don't need a crystal ball, because you can carry over any amounts left in your account from year to year. You should be aware that it is your responsibility to report both qualified and non-qualified withdrawals from your HSA when you file your tax return.
Your HSA isn't just for you. You may file claims for yourself, your spouse and others who qualify as dependents on your federal income tax return.
Decide how much to contribute
You may want to contribute the maximum each year for the greatest tax benefit, since you can carry over unused amounts from year to year. There are limits to how much you can contribute, based on government regulations. You may also contribute additional amounts, up to the annual maximum, at any time until April 15th of the following calendar year.
Shop around for care
One advantage of an HDHP is that, until you reach your deductible, you're a cash customer. You may want to check with a number of providers to compare rates and to see what discounts are available for cash.
Get reimbursed
Most likely, your HSA will have a special card or checkbook for you to use. The claim may first need to be sent to the health plan for processing. If so, you will receive an Explanation of Benefits (EOB) form from your health plan.
With your HSA, you can be reimbursed up to the amount remaining in your account at any time.
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