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Got an HSA? Here’s What You Need to Know

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Note: Under the 2020 CARES Act, in response to COVID-19 (the coronavirus) some rules about how you can use HSA funds have changed. Contact your HSA servicer, health insurer and/or human resources department for further information.

What we’ll cover:

  • An HSA allows you to save money to use for medical expenses that earns interest, as long as you’re covered by a High Deductible Health Plan (HDHP)
  • If you fund an HSA with money after taxes, you may be able to deduct these contributions on your tax returns
  • In 2020, you’ll be able to deposit up to $3,550 to your HSA if your plan is just for you

The math behind choosing a health insurance plan that fits your needs can be complicated, so our advice on that front is talk to experts and friends, and also assess your current needs to make that decision.

Our focus, and where we come in, is explaining how a Health Savings Account works. 

Word of caution – we’re talking only about HSAs here, not HRAs (Health Reimbursement Arrangements) or FSAs (Flexible Spending Accounts) which work a little differently. 

A few requirements for HSAs 

You need to meet these requirements to be able to fund a health savings account:

  1. Your health insurance plan has to be considered a High Deductible Healthcare Plan (HDHP), which requires you to reach your deductible with out-of-pocket payments before benefits, like co-payments, kick in. Your employer or insurance company will be able to tell you if you’ve got an HDHP.
  2. Your healthcare coverage can only be through an HDHP (you can’t be covered by a partner’s non-HDHP insurance)
  3. You’re not covered by Medicare
  4. You’re not listed as a dependent on someone else’s tax return

A lot of rules (we know).

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The basics of HSAs 

A Health Savings Account is a place you can park money and use to pay for qualified medical expenses, as long as you’re covered by an HDHP. While money in an HSA earns interest, it’s different from your typical savings account and it’s also different from a catch-all emergency fund. Here are some key highlights:

  1. You don’t pay federal taxes on money in your HSA (as long as the money is used to pay for qualified medical expenses), though you may pay state taxes (depending on your state)
  2. You can only use HSA funds for qualified medical expenses, otherwise you'll have to pay federal taxes
  3. There are limits to how much you can deposit into your HSA each year
  4. The money doesn’t expire, and you’re not required to make withdrawals

Isn’t an HSA just an emergency fund with a different name? Why does this matter

We get it, health expenses can sometimes be emergency expenses. But there are a few differences between having money in an account “for emergencies” and having an HSA that’s meant only for medical expenses and that has its own IRS category.  

The HSA includes tax benefits other savings accounts may not.

If you’re contributing money to your HSA, you won’t pay federal taxes on the interest, unlike the interest you earn with a traditional savings account or a certificate of deposit.

Depending on how it’s funded, there could be an additional benefit: If the money you contribute to an HSA is taken out of your paycheck before taxes, this could lower your taxable income. If you fund an HSA using after-tax dollars, you may be able to deduct these contributions on your tax returns, but it’s a good idea to double-check with a tax professional to see if this applies. 

HSAs could help you bolster your savings for when you’re older.

Having different buckets for different expenses is a tenet of budgeting and long-term financial planning (hello, retirement!).

Because you can only use the money tax-free for qualified medical expenses, when you contribute money to an HSA, you’re creating a pool of funds for this specific type of expense.

If you use HSA funds for things that aren’t “qualified medical expenses” you’ll have to pay federal taxes.

What can you spend your HSA money on?

The IRS outlines what is considered a qualified medical expense. Their most recent list is from 2018 (as we write this) and your insurer will also be able to guide you about what you can use the money for. In general, eligible expenses include the medical bills you pay before reaching your deductible, co-pays, co-insurance and some over-the-counter medicines.

Important note: Congress temporarily modified some of the restrictions around when you can use HSA funds as part of the CARES Act. We address some of the changes here, but check with HR and your HSA provider for the last word on how these changes work.

If you’re single without dependents in 2020, your HDHP deductible will be at least $1,400. If your plan is for a family, your deductible will be at least $2,800.

How do you add money to a Health Savings Account?

HSAs work a lot like typical savings accounts – you deposit money and it earns interest.

There are two ways to fund your HSA:

  • If your HDHP is through work, your company can withdraw money from your paycheck – before taxes – and deposit it in your HSA.
  • In some cases, you may be covered by an HDHP that qualifies for an HSA, but need to set up your account though a financial institution, such as a brokerage or bank. If that’s the case, you can deposit the funds directly with that institution.   

How much can you contribute to an HSA?

In 2020, you’ll be able to deposit up to $3,550 to your HSA if the policy is just for you. If the policy covers your family, you’ll be able to deposit up to $7,100 (and an additional $1,000 if you’re 55 or older). Employers sometimes contribute to HSAs, which can increase your savings.

What are the other benefits of an HSA? 

For one, the money is always yours. If you change jobs, if you change insurers or if you retire, it doesn’t change things: the money you’ve contributed travels with you.

Another benefit is that there’s no deadline to use the money. You’re not required to use the money in your HSA by a certain date or age. 

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Can you use your HSA to pay for insurance premiums?

After you turn 65, you can use the money in your HSA to pay your health insurance premiums.

Before age 65, you may be able to use your HSA to pay your health insurance premiums, depending on your circumstances. Two situations include:

  • If you’re unemployed and using the money to pay for your health insurance
  • If you’ve left your job but are keeping your company’s healthcare through COBRA, the legislation that may let you keep a former employer’s health coverage for a set amount of time

How long can you add money to your HSA?

As long as you’re covered by an HDHP, you can add money to your HSA. If you’re covered by a partner’s plan, you can contribute to your HSA as long as their plan is also a HDHP.

What happens to your HSA if you no longer have an HDHP?

If you switch to a health care plan that is not an HDHP, you get to keep the money you’ve saved in your health savings account. You can also continue to spend the money on qualified medical expenses. The only real change is that you won’t be able to add money to your HSA if your new plan is not an HDHP.

What happens if you use the money for something else?

Your original contributions will be taxed as income, and you can get socked with an additional 20% tax if you use the money for something that’s not on the IRS’ list of approved medical uses if you’re under 65.

Over 65? You won’t have to pay the additional 20% tax, but your contributions could be taxed as income if you use the money for something that’s not a qualified medical expense. 

Even if the income tax isn’t a deal-breaker when you’re 65 or older, you still may want to hold off on raiding your HSA for other purposes.

As Gallup pointed out in a summary of its findings from their poll conducted on healthcare costs in April 2019: About 7.5 million seniors said they couldn’t afford their prescriptions, and 80% of the prescriptions they could not afford were for somewhat to very serious health conditions. 

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.