Health Savings Accounts (HSAs) are like personal savings accounts, but the money on them is used to pay for health care costs. You, not your employer or insurance company, own and control the money in your HSA.
One of the advantages of an HSA is that the money you put into the account is not subject to taxes. To be eligible to open an HSA, you must have a special type of health insurance plan called a high-deductible plan.
Can I Open A Health Savings Account Without Insurance?
Can i open a health savings account without insurance? Yes, you can open a health savings account (HSA) even if your employer doesn’t offer one. But you can only make contributions for the current year if you’re covered by an HSA-qualified health plan, also known as a high-deductible health plan (HDHP). And you may not be covered by any other coverage that disqualifies you as defined by tax law, such as Medicare, Medicaid, TRICARE, or a non-HSA qualified spouse’s health plan. You cannot be addressed as a taxpayer in that year either.
It’s worth contributing to an HSA because it can be a powerful means of savings as well as a way to help pay for health care costs. First, there are the potential tax benefits. Contributions, up to the annual limit set by tax laws, can be deducted from your taxable income for federal and most state income taxes; All interest and investment income in your HSA is accrued tax-free, and withdrawals for qualified health care payments remain tax-free.
Then there is the flexibility. Unused funds in the account will continue to roll over from year to year, even if you cancel coverage in an HSA-qualified health plan. And after age 65, you can withdraw money from the non-medical expense account without paying an additional 20% tax (but the distribution is subject to ordinary income tax because it is not a qualifying health care payment).
How does a health savings account work?
Contributions to an HSA are tax deductible. This means contributions are deducted from payroll for employer-sponsored plans. For other people, especially the self-employed, deductions can be taken when filing tax returns for the year.
Withdrawals from an HSA are tax-free as long as they are used to pay for qualified medical expenses. These costs may include dental and eye care payments, costs that some standard health insurance plans may not cover.
Most HSAs issue a debit card so you can pay for prescription drugs and other eligible expenses with the card. If you are expecting a bill in the mail, you can call the billing center and make a payment over the phone using your debit card.
Any money in your account at the end of the year will remain in your account to pay for future medical expenses. Balances at the end of the year are carried forward indefinitely. The account and associated funds are yours and you retain ownership even if you change health insurance policies, change jobs, or retire. While in the account, the money grows tax-free.
How much can I contribute to an HSA?
The IRS sets limits that determine the combined amount you, your employer, and someone else can contribute to your HSA each year. For 2021, the maximum contribution amounts are $3,600 for individual coverage and $7,200 for family coverage (rising to $3,650 for individuals and $7,300 for families in 2022). You can add up to an additional $1,000 as a “catch-up” contribution if you are 55 years of age or older.
How can I use the money in the HSA?
Your HSA funds can be used to pay for qualified medical expenses incurred by you, your spouse, and your family members. The IRS lists what are and are not qualified medical expenses, detailed in IRS Publication 502, as medical and dental expenses. In general, qualified expenses include almost any medical expenses you may incur, such as amounts paid for diagnoses, cures, extenuating circumstances, treatments, and preventive prescription drugs.
One of the biggest advantages of the HSA is that it can be used to make payments that count towards your deductible. In addition, the HSA serves as a sort of tax haven, meaning you don’t pay taxes on the money you contribute. This saves you the taxable amount and allows you to spend those funds on medical expenses that you probably would have paid with after-tax dollars anyway. Keep in mind that you can also use the bill for more of the costs you incur with your primary health insurance policy. For example, if your health insurance policy doesn’t cover dental or eye care, HSA funds can still be used for those bills.
There are several things that an HSA cannot be used for. It cannot be used to pay insurance premiums. Other ineligible expenses include over-the-counter products such as toothpaste, toiletries, and cosmetics, as well as most cosmetic procedures. A holiday to a healthier climate would not be an option either.
Over-the-counter charges that do not require a prescription are generally not allowed, such as charges for toothpaste, toiletries, and cosmetics, as well as nicotine gum or nicotine patches.
If you are 64 or younger and withdraw money for an unqualified expense, you must pay tax on the money (taxed as income), plus a 20% penalty. If you are 65 or older or are disabled at any age, you will still owe tax on the amount, but you will not have to pay the penalty. So honestly, after age 65, you can withdraw money from the HSA for anything.
How can I set up an HSA?
You must first register for an HDHP. If you take that step through your employer’s human resources department, they should be able to advise you on setting up your HSA. Most employer-sponsored HDHPs have an associated HSA provider that you can work with.
If no HSA is included with your HDHP, you can set up the account yourself. Banks, credit unions, and brokerage houses offer HSAs. Each HSA provider can create its terms. HSAs through a broker may allow you to invest your contributions in stocks, bonds, or funds. HSAs Bank generally offer optimal interest rates.
Once you’ve selected a provider, the enrollment process is fairly straightforward: you’ll be prompted to fill out an application with information about your HDHP. Once your account is approved, you can fund the account and start using it for qualifying spending.
What are my contribution limits?
For exact limits, see our Annual Limits Guide (pdf). If you turn 55 during the tax year or are already 55 or older, you qualify for an additional contribution of $1,000 per year. As far as balances go, there are no limits or thresholds that you need to adhere to.
What costs can an HSA cover?
HSA funds can be used to:
- Qualified out-of-pocket medical expenses you incur that are not covered by your health plan
- Medical, dental, or visual coinsurance and copays prescribed medicines
- Prescription glasses and supplies (glasses, safety glasses, safety glasses, sports glasses, sunglasses)
Some medical treatments not covered by your insurance, such as visits to a chiropractor
You can start by looking at the various health care options your employer offers to determine if an HSA-qualified health plan is right for you if offered. If you decide to enroll in an HSA-qualified health plan, you should also consider opening an HSA and contributing as much as possible to the annual limit. HSAs are available from a variety of institutions, but it’s worth noting that not all HSAs are created equal; some providers charge extra for the debit card or investment portion of the account.
Why were health savings accounts created?
HSAs and high deductible health plans were created as a way to control health care costs.
The idea is that people spend their money on healthcare more wisely if they manage their own money.
Is a health savings account right for me?
Like any healthcare option, HSAs have pros and cons. As you weigh your options, consider your budget and what care you are likely to need in the coming year.
If you are generally in good health and want to save for future health care costs, an HSA may be an attractive option. Or if you are nearing retirement, an HSA may make sense because the money can be used to offset health care costs after retirement.
On the other hand, if you think you might need expensive health care next year and find it difficult to meet a high deductible, an HSA and a high deductible may not be your best option.
What Are Some Potential Benefits of Health Savings Accounts?
You determine how much money you set aside for healthcare costs.
You decide how your HSA money is spent. You can look around for care based on quality and costs.
Your employer may contribute to your HSA, but you own the account and the money is yours even if you change jobs.
Any unused money at the end of the year is carried forward to the next year and is yours indefinitely.
You pay no tax on the money you put into your HSA.
Some HSAs pay interest on unused money in your account or invest the money in mutual funds or other financial products. Income from an HSA is also tax-free.
What Are Some Potential Disadvantages of Health Savings Accounts?
The disease can be unpredictable, making it difficult to accurately budget health care spending.
It can be difficult to find information about the cost and quality of healthcare.
Some people find it difficult to set aside money to put into their HSA accounts. Older and sick people may not be able to save as much as younger and healthier people.
The pressure to save money in your HSA can keep you from seeking medical care when you need it.
If you take money out of your HSA for non-medical expenses, you will have to pay tax on it.
Who can open a health savings account?
Your employer can offer you an HSA option, or you can open an account yourself through a bank or other financial institution. To qualify, you must be under age 65 and have health insurance with a high deductible.
If you have a spouse who uses your insurance as secondary coverage, he or she must also be enrolled in a high-deductible plan.
This high deductible should be your only health insurance policy. However, you can have dental, facial, disability, and long-term care insurance.
What is a high deductible and how does it work?
As the name implies, it is health insurance with a high deductible. A deductible is the number of medical expenses you must pay each year before coverage takes effect.
High-deductible plans don’t start paying until you’ve spent at least $1,400 (for an individual) or $2,800 (for a family) of your own money on health care costs, although the deductible varies by plan. The maximum deductible is $7,000 for an individual or $14,000 for a family.
While the deductible is high with this type of plan, the premium (the regular rate you pay to get coverage) is often lower than traditional plans. Also, many preventative services, such as mammograms, are covered before you meet your deductible.
You can use your HSA to pay deductible expenses, as well as copays and certain other health care costs determined by the individual HSA.
Health insurance policies with a high deductible are becoming more common. Rather, companies offer them as their only plans or as one of the limited options they offer. It is essential to carefully review the details of the plan’s coverage, including the deductible, and the limit on how much you should pay for medical expenses in a year.
How much money can I put into a health care savings account every year?
The Internal Revenue Service sets contribution limits for HSAs. In recent years, the limits have been $3,600 for individuals and $7,200 for family coverage.
Once you’re enrolled in Medicare, you can’t continue to contribute to your HSA. However, in the years before retirement, between the ages of 55 and 65, you can make “catch-up contributions” of up to $1,000 over the limits to help pay for medical expenses in retirement.
Can my employer also contribute to my healthcare savings account?
Yes, your employer can contribute to your HSA. However, the total of your employer’s contribution plus your contribution must remain within the contribution limits.
Are Health Savings Accounts Similar to Flexible Spending Accounts (FSAs)?
Yes, but there are a few key differences. One difference is the amount of unspent money you can reinvest each year.
With an HSA, you can reinvest the entire unspent amount. For an FSA, recent rules allow you to roll over up to $550 per year if your employer chooses to offer the option. Or, your employer may choose to provide a grace period at the end of the year, during which you can use unspent money for up to two and a half months after the plan year ends.
Another difference is that the money you put into an HSA is yours and you can take it with you when you change jobs or retire. You cannot take money from an employer-sponsored FSA with you when you change jobs or retire.
Finally, it is important to know that in most cases you cannot have both an HSA and an FSA.
How do I find information about medical costs and quality so that I can make informed decisions?
It can be challenging. At the moment it is difficult to get reliable information about the cost and quality of treatment options, doctors, and hospitals.
Your employer or health insurance company may provide some web-based tools or a phone number to call for basic information. Public hospital pricing websites and state-based pricing transparency websites also provide information.
The hope is that as health savings accounts and other consumer-oriented healthcare options become more widespread, access to information about cost and quality will increase.
Can I withdraw money from my healthcare savings account for non-medical costs?
Yes, but if you withdraw money for non-medical expenses before you turn 65, you will have to pay income tax on the money and an additional 20% penalty. If you withdraw money for non-medical expenses after your 65th birthday, you will not have to pay a penalty, but you will have to pay tax on the money.