An HSA, or Health Savings Account, is the best tax vehicle allowed by the IRS, allowing people to deposit money tax-free, grow it tax-free and spend it tax-free on qualified medical expenses. To contribute to an HSA, an individual must be covered by an HSA-qualified plan, a lower-cost plan to guard against medical catastrophes and cover preventive care free of charge, but with minimum deductibles to expose people to the day to day costs of health care. HSA plans and accounts encourage more prudent use of health care because they are spending their own money and may keep what they do not spend.
Once the money is deposited into an HSA it is fully under the control of the individual and may be used to pay for qualified health expenses for the account owner, his or her spouse and any current tax dependents at the time of the expense for the rest of the accountholders life.
An accountholder may open an HSA with any bank, credit union or specialty HSA Trustee he wishes and may transfer funds between trustees at any time. Many employers will facilitate the opening of an HSA, pay the fees and even contribute some of their premium saving into the employee’s account. But you own and control the HSA, even if you leave your employer.
Unlike a Flexible Spending Account (FSA), HSA accountholders decide how much to put into their accounts, may adjust their contributions any time during the year, and have no pressure to spend the money by the end of the year – the money is theirs for life. In fact, because all growth in HSAs is tax-free, many HSA accountholders pay medical expenses out of pocket and keep receipts, allowing money in the HSA to grow in a savings or investment account. This, in effect, sets up a future tax-free withdrawal any time in the future. It is wise to keep receipts in case of an audit, since the IRS may ask you to prove that all spending from the HSA has been limited to qualified expenses.
HSAs also differ from FSAs in that the expenses are not subject to substantiation prior to being reimbursed, giving HSA accountholders easier access to funds through unfettered debit cards, bill pay or transfers to their bank account. Expenses are still limited to the same IRS restrictions to be used to treat or diagnose an illness, injury or condition, but allows the HSA accountholder to adjust to changes during the year, even after an expense has occurred. If at the end of the tax year an HSA has been used for non-qualified expenses, the accountholder must pay a 20% penalty and recognize the income he had previously shielded from taxes.
Because of the flexibility and favorable rules, a growing number of HSA accountholder view their account as a long-term savings vehicle, diverting contributions from 401-ks and IRAs into the HSA because you can also use HSA funds after age 65 for non-health-related items without penalty. So the HSA funds can be used anytime in life to pay for medical expenses and can also be used for any purpose in retirement with the same tax treatment as other retirement vehicles, but without any means-testing or required minimum distributions.
An increasing number of employers are starting to add HSA’s to their list of health insurance options. You can also enroll in an HSA qualified plan if you are buying insurance on your own through a public or private exchange or directly from an insurance carrier. If you’re enrolled in a high-deductible health plan, consider obtaining an HSA – it’s a great way to have more freedom and flexibility when paying for healthcare. Below are a few of many services offered through ZendyHealth that are covered by HSAs:
Todd Berkley is an HSA industry veteran who runs AskMrHSA.com, and is the author of the HSA Owner’s Manual.