For many people, it is open enrollment time for Health Savings Accounts (HSAs). Here are ten important things to know about the popular benefit account, including HSA portability:
1. HSA Portability and Ownership
Unlike a Flexible Spending Account (FSA) or a Health Reimbursement Arrangement (HRA), both of which are owned by the employer, HSAs are owned by the individual. This means that the account owner funds the HSA, spends the money (within IRS regulations), earns interest, and chooses whether or not to invest the money. Most importantly, the individual keeps the account (HSA portability) should their employment status change due to job loss, changing company, or retirement. Employers may also choose to contribute to the HSA, but the account owner keeps the funds.
2. Tax Benefits, 3 Times
A person with an HSA can enjoy up to three times the tax benefits. First, contributions to the account are not taxed. Second, interest earned on the HSA balance is tax-free. And third, withdrawals for qualified medical expenses aren’t taxed. That can result in some significant tax savings!
3. Flexible Contributions
With an HSA, account owners can change the amount they contribute any time during the plan year. For instance, if a person originally elects to set aside $2,000, but in July needs to reduce the annual contribution to $1,500, the person can do that. With an FSA, contributions are fixed once the plan year starts.
4. Rollover Funds
With an HSA, there is no ‘use it or lose it’ rule. Unused funds at the end of the plan year rollover to the following year, allowing the account to grow for later use.
5. Option to Invest
Once the account owner meets the HSA provider’s minimum balance threshold, the funds are eligible for investing. This can help account owners grow their accounts quickly. The minimum threshold varies, ranging from as low as $1,000 to as high as $2,500.
6. Pay for Prior Medical Expenses
In order to get reimbursed for a prior medical expense, the account must have been established before the expense occurred. The account holder should maintain detailed records (such as keeping receipts) in order to file at a later date. For example, if a person visited the emergency room in May 2015, as long as the HSA was established prior to May 2015, then that person can file at a later date for reimbursement.
7. Use it as a Retirement Income
After age 65, account owners can make withdrawals from their HSA for any expense without penalty; however, withdrawals for anything other than eligible medical expenses are taxed as income.
8. Make Catch-up Contributions
Account owners can make ‘catch-up’ contributions of up to $1,000 over the annual contribution limit in the year they turn 55. People can make the extra contributions before their 55th birthday, as long as it’s within the same calendar year.
9. Cover COBRA and Medicare Premiums
As a general rule, a person cannot use an HSA to cover the cost of insurance premiums with two exceptions: first, those who were separated from their employer can pay the cost of their COBRA premiums; and second, people 65 years old or older can pay for Medicare Part B, Part D, and Medicare Advantage (Medicare HMO) premiums. However, HSAs cannot be used to pay Medigap insurance premiums.
10. Change of Healthcare Plans? No Problem
To become eligible for an HSA, a person must be covered by a High Deductible Health Plan (HDHP). Once the HSA is established, the person owns the account. If that person switches to a plan that is not an HDHP, the HSA funds can cover eligible medical expenses that occur under the new plan. However, the account owner cannot deposit more funds into the account unless they become covered under an HDHP again.