What is a health savings account (HSA) and how does it work? Top 20 Easiest way
Health savings account, At some point or another, we’re all going to need medical care. Simple expenditures like bandages might be inclusive, as well as more costly procedures like corrective eye surgery. Paying out of pocket or using insurance may be the main methods of payment for many Americans. There is a way to reduce some of these expenses, though. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, also known as the Health Savings Account, or HSA, was passed by Congress.
The aim of creating these accounts were so that customers with high deductible health plans (HDHPs) may save money aside for impending medical costs. But, HSAs have changed over time from being a way to put money down for future medical expenditures to becoming an account where you can increase your retirement savings.
What is a Health Savings Account (HSA)?
A high-deductible health plan (HDHP) holder can open a tax-advantaged account called a health savings account (HSA) to save money for qualified medical expenses. A maximum annual contribution may be made to the account by either the individual or their employer. The payments are invested over time and can be used to cover certain medical costs, including prescription drugs and treatment for one’s health, dental, and eyesight.
How Does HSA Work?
If you opened an HSA through your workplace, you would probably have a variety of fund choices to choose from when creating an HSA portfolio. The procedure is comparable to a 401(k) plan.
Your contributions would be automatically withheld by your employer from each pay check and used to fund your account. You can decide how much of your money should be taken out of your paycheck and put into your HSA.
But, you might have access to a much wider selection of funds if you opened an HSA through a bank or other financial institution. Even if your firm provides an employer match to its employees enrolled in the company HSA, you won’t have access to it.
However, several HSA providers will give you a debit card connected to your HSA amount regardless of where you formed your HSA. But, for some plans, you might have to provide proof of your eligible medical expenses in order to receive reimbursement. Thus, be sure to record every hospital visit on paper.
How to Qualify for HSA
You must open an HSA in conjunction with a high deductible health plan (HDHP). Thankfully, this kind of health insurance policy is widespread. The IRS states that an HDHP needs to fulfill the following specifications for 2019.
- Minimum deductible: $2,800 (family plan) or $1,400 (self-directed).
- Maximum out-of-pocket expenses: $14,200 (family plan) or $7,050 (Self-Only).
You can open an HSA if your plan complies with these standards. Your employer might provide one. If not, you can still open one through the majority of banks and financial organizations.
How to Open an HSA
The benefits or human resources department of your employer is where you should start your search for an HSA. The majority of banks and financial organizations also allow you to open one. But make sure you compare prices.
On their HSAs, some banks provide better interest rates than others. Your HSA funds may be invested by financial services companies in mutual funds and other securities. Some, however, have higher prices than others. While others charge nothing.
Therefore be sure the company you work with has low or no account fees and doesn’t demand a minimum balance. Moreover, choose a fund or funds that are appropriate for your level of risk tolerance. Use our asset allocation calculator if you’re unsure of how yours compares. It provides you with a general idea of what a typical investment mix would entail based on various risk thresholds.
What can an HSA Cover?
Treatments for physical or mental diseases are under qualified medical expenses. So, you can pay for anything from X-rays to acupuncture using HSA funds.
Also, you are able to reduce your deductible using HSA funds. You must spend this much money on medical costs before your insurance provider begins to contribute. But, coinsurance and copayments are also able to be paid for with HSA funds.
Also, even if your health insurance plan does not cover these services, you can still utilize your HSA to pay for qualified dental and vision expenses. Furthermore, even if your spouse and any dependents under the age of 26 enroll in different health insurance policies, they are still eligible for these benefits.
And in an emergency, people with mobility challenges can utilize HSA funds to cover transportation costs, like a taxi to a local hospital. This benefit may save you from making an expensive ambulance journey.
What can an HSA not cover?
HSA funds, however, do not fully cover all medical and healthcare-related costs. So don’t anticipate using your HSA funds to pay for pricey gym memberships or the newest exercise fad. Also, you cannot use HSA funds to pay for things like cosmetic surgery, over-the-counter drugs, or teeth whitening.
Regrettably, you cannot also utilize HSA funds to cover the costs of a basic insurance plan.
What is the 2023 HSA contribution limit?
You can minimize your federal income taxes by opening an HSA and contributing to it annually with tax-free money. The HSA contribution limit for 2023 is $3,850 for single HDHP coverage and $7,750 for family HDHP coverage. You have until April 15, 2024 to make HSA contributions for 2023 if you have an HDHP coverage.
If I switch to insurance that isn’t a high-deductible health plan, what will happen to my HSA?
No matter what happens to your health insurance, your HSA is yours. However, you must stop making contributions to your HSA if you switch to a non-HDHP (or if you obtain coverage under a different health plan in addition to your HDHP) at that point. In order to cover medical bills, including out-of-pocket expenses under your new non-HDHP health plan, you may still withdraw tax-free money from your HSA.
Is it possible for me to use my health savings account to cover my spouse’s medical costs?
Yes. Even when not covered by your HDHP, you can use the account to pay for the medical costs of a spouse or other family members. Family members include dependent relatives or minor children. In other words, even when not covered by your HDHP, it applies to everyone who lives in your tax household.
What medical costs can I cover with money from my HSA?
Deductibles, copayments, coinsurance, vision and dental treatment, as well as other out-of-pocket medical expenses, may all be considered HSA-eligible expenses. Also, a wide variety of services are eligible. Acupuncture, chiropractic care, and even traditional Chinese medicine can be paid for with your HSA.
Overall, HSAs are among the strongest tax-advantaged investment and savings structures permitted by U.S. tax law. They are sometimes referred to as triple tax-advantaged for the following reasons:
- Donations are not taxable.
- The funds are able to grow tax-free through investments.
- Withdrawals are tax-free as long as they are used for permissible medical costs.
Medical costs typically rise as a person gets older, especially once they retire and beyond. So, if you qualify, creating an HSA early and letting it grow over time can help you significantly secure your financial future.
FAQs About HSA
Is it possible to combine HSAs and ACA health plans?
Yes. There are HSA-qualified high-deductible health plans offered through the exchange/marketplace or directly from insurers that offer ACA-compliant coverage in almost every region of the country.
Exactly how can I open a health savings account?
A wide range of banks, credit unions, and trading houses offer accounts for securing and expanding HSA funds, giving enrollees plenty of options.
Can a self-employed person open a Health Savings Account (HSA)?
Yes. High-deductible health plans (HDHPs) holders are able to open a Health Savings Account (HSA). If you work for yourself, you should research the HSAs provided by banks or brokerages like Fidelity, HealthEquity, or Lively. Make sure you carefully consider your options to get the finest HSA for your need.
Do I have to spend the entire balance in my HSA each year?
No. Unlike to a Flexible Spending Account (FSA), your HSA contributions are subject to annual rollover. Users can accumulate money for more expensive medical needs or utilize it as an investment fund after retirement because the monies can also be invested.
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