Depending on what type of health insurance coverage you have, you may be eligible to make use of either a Health Savings Account (HSA), a Health Reimbursement Account (HRA) or a Flexible Spending Account (FSA). An HSA is for high-deductible health plans, and both you and your employer can contribute.
The purpose of a HSA is to allow patients to set pre-tax money aside for future healthcare costs which can be great, particularly for younger, healthier people. Patients that opt to use an HSA tend to save more on health insurance premiums, and their income is taxed after HSA contributions which reduces their overall taxable income.
A huge benefit of an HSA is the ability to pay for qualified medical expenses with pre-tax dollars. The “qualified” medical expenses are determined by the IRS and include some of the following:
- Dental services
- Visions services
- Prescription drugs
- R-rays, MRI’s, and other related imaging
- Psychological counseling services
- Smoking cessation programs
- Chiropractic services
- Medical supplies and equipment – including hearing aids, breast pumps, eyeglasses, etc.
- Weight loss programs for specific diagnosed diseases like obesity, hypertension, and heart disease
- Other out-of-pocket payments that were for qualified medical expenses that weren’t covered by your insurance including the following premiums:
- Medicare Part A or B
- Premiums for for health insurance for qualified long-term care
- COBRA continuation coverage
- Health insurance for those receiving unemployment funds
Visit this link to see a full list of qualified HSA expenses.
The list of HSA qualified expenses is pretty inclusive, but since HSA first came about in 2003 medical expenses that qualify have changed quite a bit. For example, a greater number of mental health care costs now qualify, but if you are thinking of purchasing a spa-day or vacation, you’re better off taking a trip to the therapist if you want to be able to spend your HSA funds. Below are some of the expenses that you are not considered qualified medical expenses:
- Elective plastic or cosmetic procedures
- Child care for non-sick babies
- Maternity clothing and apparel
- Over the counter medication
- Funeral expenses
- Daily food expenses
Visit this link for a full list of eligible and non-eligible expenses.
Before you get excited about getting an HSA, also be sure to keep some things in mind. All qualified expenses have to be incurred after setting up an HSA account, so if you have an FSA and/or a HRA in addition, you cannot double-dip from these accounts. Also, be sure to keep track of all of your expense documents and receipts, as you may get audited by the IRS and ask for proof of the your qualified medical expenses.
Oops! You spent HSA money on something that was not a qualified medical expense…now what? If this should happen, come tax time you must enter these non-qualified expenses on Form 8889, and then report the total amount on your Form 1040. Unfortunately, if you are under 65 years old then you are subject to a 20% penalty for using your funds on a non-qualified expense. If you are over 65 however, you can use your HSA funds on non-qualified medical expenses without paying a penalty, though you will now be liable for paying income tax.
So the end of the year is coming and you didn’t spend all the money in your HSA account…no worries. Unlike the FSA, there is no use-it-or-lose-it rule. Your account balance will roll over to the next year. This can be an effective way to save up for retirement and just one of the ways to get the most out of your HSA. You may visit this link for more information on maximizing your HSA.