Your health savings account (HSA) may give you some peace of mind that you have money saved for a medical emergency or to feather your retirement nest. But, there are rules to live by and things to be careful about.
1. Know the limits.
Your health plan has to meet federal guidelines – for deductibles and out-of-pocket expense limits – for you to contribute to an HSA. Your health insurer should tell you if your plan is eligible. You also can’t have some other types of health coverage, including a full-service flexible spending account (FSA), Medicare or Medicaid.
Then, you have to limit your deposits to the maximum allowed by law. These limits change every year, too. HealthEquity and other financial institutions post the information.
2. Only use it to pay for the medical expenses that are allowed.
There are hundreds of them. They’re called “qualified medical expenses.” Here’s a guide from HealthEquity. Be aware of what’s not on the list, too. There’s a penalty for using health savings account dollars on expenses that aren’t qualified.
Update: In April 2020, the CARES Act expanded the list of qualified medical expenses to remove the prescription requirement for over-the-counter medicines and include menstruation products. The act, passed in response to the coronavirus (COVID-19) pandemic, made these changes effective Jan. 1, 2020.
3. Keep receipts for expenses you pay from your HSA.
If the IRS ever asks how you spent funds from your HSA, you may have to produce receipts that show you spent the money on qualified health expenses.
4. Keep receipts of all your HSA-qualified health expenses.
This is true even if you don’t use your HSA right away to pay for them. You may want to reimburse yourself later from your HSA.
Here’s here an example: You may pay for expenses – let’s say some prescriptions, doctor’s office visits and a dental implant – out of your own wallet. The total is $2,250. Next year, you’re a little short at the holidays. You want to take money out of your HSA. You can take up to $2,250 you paid for last year – but you want to have the receipts (see #3).
5. Know whose expenses you can pay from your HSA.
Young adults can stay on their parents’ health plans until they’re 26. Many of those young adults, though, are no longer dependents on their parents’ tax returns. And there’s the rub: if they’re not, you cannot use your HSA to pay for their qualified medical expenses.
Want to help those kids starting out? You can, by giving them money to open their own HSAs. They’ll get the income tax deduction, though.
Test your knowledge
The HSA quiz from HealthEquity helps you see how much you know about HSAs.
For more information on HSAs, visit the HealthEquity website. For detailed information on tax treatment of HSAs, qualified medical expenses and more, visit irs.gov. Not sure you need one? Read our post with five good reasons to have an HSA
Nothing in this communication is intended as legal, tax, financial, or medical advice. Always consult a professional when making life changing decisions. It is the members’ responsibility to ensure eligibility requirements as well as if they are eligible for the plan and expenses submitted.