Rules for Your Health Savings Account (HSA)
Find out what a health savings account (HSA) is, who can have one, and how to make distributions the right way.
Laura Adams, MBA
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Rules for Your Health Savings Account (HSA)
A long-time Money Girl podcast listener, who also happens to be my husband, asked me:
“My new dentist requires me to pay for services in full and then submits my insurance claim. What happens if I pay using my health savings account (HSA), but get reimbursed by my insurance company later on?”
In this episode I’ll answer my dear husband’s question, tell you what a health savings account (HSA) is, who can have one, and how to make distributions the right way.
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What Is a Health Savings Account (HSA)?
An HSA is a tax-exempt account that you can use to pay or reimburse yourself for certain medical expenses, like visits to the doctor or dentist, prescription drugs, and eyeglasses. But there’s no time limit or requirement to spend the money because it simply rolls over from year to year, with no penalty.
You can fund an HSA, up to certain annual limits, using your own contributions, funds from a family member, or contributions from an employer. Deductions are made either on a pre-tax basis or can be deducted on your tax return, even if you don’t itemize deductions.
That means you never pay tax on money that goes into your HSA, which is a nice savings. Plus, you also get another tax break because the money in an HSA grows tax-deferred.
See also: How to Pay Less Tax Using Deductions and Credits
However, if you spend any amount of HSA funds on non-qualified expenses, like groceries or a trip to Maui, you could wind up having to pay ordinary income tax, plus a 20% penalty on those distributions.
If you spend any amount of HSA funds on non-qualified expenses, like groceries or a trip to Maui, you could wind up having to pay ordinary income tax, plus a 20% penalty on those distributions.
Who Qualifies for a Health Savings Account (HSA)
But, unfortunately, not everyone qualifies for an HSA. To be eligible to open up and contribute to an HSA, you must already be covered by a high deductible health plan or HDHP. No matter if you get an HDHP on your own or through a employer, you’re still eligible for an HSA.
These policies aren’t different from regular health insurance policies, except that they have unusually high deductibles. That means you have to pay more out of pocket before your benefits begin. Because you’re responsible for more of your medical expenses, a HDHP typically costs less than a traditional low-deductible plan.
See Also: The Benefits of Health Savings Accounts
What Are the Annual Limits for a Health Savings Account (HSA)?
For 2013 and 2014, the minimum required annual deductibles for a HDHP are:
- Self-only coverage (individual): $1,250
- Family coverage: $2,500
For 2014, the maximum out-of-pockets expenses (including deductibles, co-payments, and other amounts, excluding premiums) are:
- Self-only coverage: $6,350 (up $100 from 2013)
- Family coverage $ 12,700 (up $200 from 2013)
For 2014, the annual contribution limits for an HSA are:
- Self-only coverage (individuals): $3,300 (up $50 from 2013)
- Family coverage: $6,550 (up $100 from 2013)
Rules for Taking Distributions from a Health Savings Account (HSA)
Now that you know the HSA basics, let’s talk about the right way to make distributions or payments from the account. I previously mentioned that spending money on non-qualified medical expenses can really cost you. The hefty penalty is 20% plus ordinary income tax on the distribution amount.
To find out which medical expenses the IRS allows you to pay for using HSA funds, refer to Publication 969, Health Savings Accounts and Other Tax-Favored Health Plansopens PDF file for complete information.
So how should you handle a situation where you might get a refund for a medical expense from your insurance company? You can choose from 2 options:
- Pay the medical expense with your personal funds. Then you can reimburse yourself later on with HSA funds when you know if you’ll receive a refund or not. You could use an HSA check or transfer funds to your personal bank account online.
- Pay the medical expense with your HSA funds. However, any refund received would be considered an erroneous distribution if you keep it, instead of putting it back into your HSA. But the good news is that when you make a distribution in good faith for a qualified medical expense, you can repay it by April 15 of the following year with no penalty. The repayment gets classified as an adjustment to the HSA, not a contribution that would count against the allowable annual contribution limit.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.