Whenever someone is confused by their HSA, they are usually mixing up the rules between making a tax-free contribution to an account and how you can use the money once it is in the HSA account. There is actually a strong dividing line between the two.
Rules regarding which individuals can open and contribute to an HSA and how much they can deposit each year are very rigid and for the most part well understood. HSA contribution eligibility is all about carrying the right insurance coverage at the right time.
Once the money is placed into the HSA, the rules change completely. Now health plan coverage does not matter. Using your HSA to pay for medical expenses tax-free is all about paying the right expenses at the right time for people who are related to you in the right way, either through marriage or through your tax return.
So let’s dive into these basic concepts a bit further. The HSA concept is basically a deal offered by the government: If you are willing to expose yourself to higher out of pocket costs on day to day health expenses (while protecting against catastrophic expenses with low out of pocket limits), the government will give you the best tax break available to save for today’s and tomorrow’s expenses. The money will go in tax-free. The money will grow tax-free. The money will come out tax-free any time the rest of your life for medical expenses for your family. No means-testing, no required minimum distributions or other strings attached. What a deal!
So back to the two sets of rules. First, you must carry HSA-qualified coverage with a high deductible. For 2015 the minimum is at least $1,300 if your policy covers only you, or $2,600 if it covers more than one person. They want to make sure that you are actually exposed to those costs. Why? Because the pain of seeing how much things cost, or better yet, how hard it is to find out what things will cost, will make you want to shop around for the best deal – especially if you can keep the money you don’t spend.
So any other plan that will give you free care under that deductible is strictly prohibited. That includes being covered by Medicare, Medicaid or Tri-Care for military members. That means receiving free care at the VA or Indian Health Services. It also means being covered by an FSA or HSA that is not limited to vision, dental and preventive care. Those three categories are the only exceptions. An FSA or HRA through the spouse’s employer often trips people up, because they usually cover the other spouse automatically.
If your spouse or children are covered by one of these prohibited plans does not matter. The HSA is actually a trust account owned by one person and that person’s coverage is all that matters. (They must also be at least 18 and not listed as a dependent on someone else’s tax return.)
So if you have the right coverage and don’t have the right coverage, you can deposit money tax-free into a Health Savings Account. If your plan is a self-only plan you may put up to $3,350 in 2015; those in family plans can contribute up to $6,650. If you are 55 or over, you can catch up with another $1000 on top of those limits.
Once the money is deposited in the HSA, the rules change completely. Health coverage (or total lack of coverage) does not matter. The money can be used for the rest of your life on qualified expenses for yourself, your spouse, and your current tax dependents (usually known as children) at the time of the expense.
So what is a qualified medical expense? It is the same list as you would use to deduct expenses from your tax return as outlined in IRS Publication 502. The difference from this and an FSA or HRA is that the onus is on you to monitor your contributions and spending. You are in charge of your own HSA. If you spend money on a non-medical expense, it is not illegal, you will simply need to pay a 20% penalty and include the money you shielded from taxes back into that year’s taxable income. You will need to declare how much you put into your account and how much you spent on your tax form every year through Form 8889. The IRS may want you to prove what you declare on that form, so keep your receipts in case of an audit.
You must be enrolled in an HSA-qualified plan (referred to in the law as a High Deductible Health Plan) to become HSA-eligible.
A qualified plan typically will have “HSA” as part of its name, but not always. Be sure that your plan is HSA-qualified. Many high deductible plans look like HSA-qualified plans at first glance (for example, they meet the minimum deductible stated below), but the deductible does not cover a broad enough range of services or the family deductible does not work as qualified plan rules require.
Your insurance company will usually make it clear whether or not a plan is HSA-qualified, but if you are not sure whether the plan is qualified, you should check with the insurance regulator in your state.
The bad news – The IRS sets minimum deductible limits for HSA-qualified plans.
This statutory minimum yearly deductible is the amount that you must pay for medical services (other than select preventive services that are covered in full or with cost-sharing outside the deductible) that you (and the rest of your family, if you are covered under a family contract) receive within a given twelve-month period of time. The IRS adjusts the amounts every spring for the next calendar year to reflect changes in the general Consumer Price Index.
The figures for 2015 and 2016 are the following:
The good news – The IRS also sets out of pocket maximum limits.
HSA plans are actually very good insurance for those with high health care costs. In fact the ACA adopted HSA limits and applied them to all insurance sold in America –before health reform HSAs where the only plans that required a maximum limit by law.
The annual out-of-pocket maximum represents the highest total out-of-pocket costs for which an individual or family is financially responsible each year after which the insurer pays 100% of all covered services. This limit includes copays (fixed dollar amounts, such as a $25 copay for a prescription drug), deductible, and coinsurance (shared responsibility between the patient and insurer, as in the situation in which the insurer pays 80% of a bill, leaving the patient with 20% responsibility, called coinsurance). The IRS reviews this figure annually and adjusts it for general inflation. In 2015 and 2016, the figures are the following:
The other HSA eligibility requirements
You are allowed to be covered by more than one health plan and become or remain HSA-eligible. Most individuals believe that they are enrolled in only one health plan: the health insurance that they purchase through their employer or in the individual market. You may actually be covered by a second plan that you never thought of as a health plan, such as a Health FSA.
Examples of ineligible coverage:
Receiving non-preventive care from VA or Indian Health Service (each treatment disqualifies you for that month and the two following months.)
Full Health FSAs
Full health HRAs
Prescription drug plans
Examples of compatible coverage:
FSAs and HRAs limited to dental, vision and preventive care
FSAs and HRAs that kick in after the minimum HSA deductible is met
VA care for service-connected ailments beginning 1/1/16
Drug discount cards
Specific illness coverage such as a Cancer policy
Hospitalization indemnity plans
Someone liable to pay your medical expenses because of an accident or incident
Dental or Vision plans
On Friday, July 31, 2015, President Obama signed HR 3236, the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” into law. That law removes the provision in the Internal Revenue Code that disqualified people receiving non-preventive benefits for service-connected disabilities from the Veterans Administration from contributing to Health Savings Accounts. This new law also removes all veterans as a class from being counted as part of the Affordable Care Act’s employer mandate. The new HSA provision takes effect on January 1, 2016.
Until then, veterans will lose three months eligibility every time they receive non-preventive medical benefits from the VA. The law specifically states: “An individual shall not fail to be treated as an (HSA) eligible individual for any period merely because the individual receives hospital care or medical services under any law administered by the Secretary of Veterans Affairs for a service-connected disability.”
The HSA industry is working to change other laws that are restrictive for veterans and active duty military members. I wrote an article recently advocating for the VA to give funded HSAs to Veterans to help alleviate the backlog of VA care. It is a simple solution for our vets in need that would not require any new infrastructure, just a simple exception to current law.
In the article I suggest that the VA could create a simple plan structure with a cash deposit into an HSA account to cover all or part of the deductible for an HSA-qualified plan. Veterans could then access qualified health care with the HSA debit card anywhere they choose, without bureaucratic oversight. Every doctor or clinic accepts cash.
We know that people consume care more prudently when you give more control over how the money is spent or saved, which could further help control costs for the VA. Many studies show people in HSA programs are more likely to take advantage of free preventive care and engage more deeply with their care.
This concept could be extended to all VA recipients as an option. This would create choices and improve satisfaction for the veteran, and further alleviate pressure on VA hospitals and clinics and otherwise reduce costs for the VA. I receive many questions at my AskMrHSA.com education site from veterans wondering why they are not able to freely access this increasingly popular health plan option.
Thousands of current HSA trustees are ready to help immediately. The accounts earn interest and are set up with debit cards for easy access. The best HSA accounts offer educational support, bill pay, mobile apps, and investment options to grow the money not spent immediately to save for future health care costs.
No further legislation would be needed to fix this problem. This solution is available right now with the proper VA plan design.
There are also several bills pending in Congress that would allow HSA options in TRICARE, or at least the ability to leave TRICARE and later resume it in your retirement years. For now, TRICARE is completely incompatible with HSA account contributions.
Todd Berkley is an HSA industry veteran who runs AskMrHSA.com, and is the author of the HSA Owner’s Manual.