Requirements to have a health savings account (HSA)

Used in combination with a High Deductible Health Plan (HDHP), funds deposited into an HSA can be used to pay medical bills until the plan’s deductible is met and health coverage is in effect. If your health insurance has a four-figure deductible, it is important that you know the requirements to have a health savings account (HSA).

HSAs were established in 2003, as part of the Medicare Prescription Drug Improvement and Modernization Act. These savings accounts have become an increasingly popular option for consumers looking to manage their health care costs. They also function as a tax-advantaged savings tool.

Key information about HSAs:

  • HSAs allow you to set aside pre-tax income to cover health care expenses that your insurance doesn’t pay for.
  • You can only open and contribute to an HSA if you have a qualifying high-deductible health plan.
  • For the year 2020, the maximum contribution amounts are $3,550 for individuals and $7,100 for family coverage. If you’re age 55 or older, you can add up to $1,000 more as a catch-up contribution.
  • HSAs do not have a “use it or lose it” provision. Any funds still in the plan at the end of the year can be rolled over indefinitely.

Requirements to have a health savings account (HSA)

Requirements to have a health savings account (HSA)

Below we present the requirements to have a health savings account din accordance with federal guidelines.

You can open and contribute to an HSA if:

  • You’re covered by a high-deductible health plan that meets the required minimum deductible and maximum out-of-pocket limit for the year.
  • You are not covered by any other medical plan, such as a spouse’s plan.
  • You are not enrolled in Medicare.
  • You are not enrolled in TRICARE or TRICARE for life.
  • You are not claimed as a dependent on someone else’s tax return.
  • You are not covered by Veterans Administration medical benefits.
  • You don’t have any alternative disqualifying health savings accounts, such as a flexible spending account or a health reimbursement account

What qualifies as a high deductible health plan?

Generally speaking, an HDHP is a health plan that trades relatively low premiums for relatively high deductibles, as the name implies. To qualify for an HSA that can be opened in combination with an HDHP, you must meet certain criteria. The IRS sets guidelines each year, adjusting the figures for inflation. in 2020an HSA account can only be opened if the account owner’s plan meets the following qualifying criteria:

individuals families
Minimum deductible $1,400 $2,800
Maximum out-of-pocket * (includes deductibles, copays, coinsurance) $6,900 $13,800

*Please note that the out-of-pocket maximum is also designated by the plan. May include deductibles, copays, and coinsurance. Does not include insurance premiums. The out-of-pocket maximum will also typically not include out-of-network services.

How does a health savings account work?

Contributions to an HSA are tax deductible. This means they will be deducted from payroll for employer-sponsored plans. For other people, primarily the self-employed, deductions can be made when filing tax returns for the year.

Withdrawals from an HSA are tax-free as long as they’re used to pay for qualified medical expenses. These expenses may include payments for dental and vision care expenses that some standard health insurance plans may not cover.

Most HSAs issue a debit card, so you can pay for prescription drugs and other eligible expenses with the card. If you’re waiting for a bill to arrive in the mail, you can call the billing center and make a payment over the phone with your debit card.

Any money in your account at the end of the year will stay in your account to pay for future qualified medical expenses. Year-end balances carry forward indefinitely. The account and its funds belong exclusively to you, and you will retain ownership even if you change health insurance plans, change jobs, or retire. As long as it’s in the account, the money grows tax-free.

How much can I contribute to an HSA?

The IRS sets limits that determine the combined amount that you, your employer, and anyone else can contribute to your HSA each year. For the year 2020, the maximum contribution amounts are $3,550 for individual coverage and $7,100 for family coverage. You can add up to $1,000 more as a “catch-up” contribution if you are age 55 or older.

How can I use the money in the HSA?

The funds in your HSA can be used to pay for qualified medical expenses incurred by you, your spouse and your dependents. The IRS sets out what is and is not a qualified medical expense, detailed in IRS Publication 502, Medical and Dental Expenses. Generally speaking, qualified expenses include almost any medical expense you may incur, such as amounts paid for prescribed diagnoses, cures, mitigations, treatments, and preventative medications.

One of the biggest benefits of the HSA is that it can be used to make payments that count toward your deductible. In addition, the HSA serves as a kind of tax shelter, which means that you will not pay any taxes on the money that you add to the account.. This saves you the taxable amount while allowing you to put those funds toward medical expenses that you likely would have paid with after-tax dollars anyway. Keep in mind that you can also use the account for more than the expenses you incur under your primary health insurance plan. For example, if your health plan doesn’t cover dental or vision care, HSA funds can be used for these payments.

There are some things an HSA cannot be used for. It cannot be used to pay insurance premiums. Other ineligible expenses include over-the-counter items like toothpaste, toiletries, and cosmetics, as well as most cosmetic surgeries. A vacation in a healthier climate will also not be accepted.

Fact: The HSA generally cannot be used for over-the-counter products, such as the cost of toothpaste, toiletries and cosmetics, as well as nicotine gum and patches.

If you’re 64 or younger and you withdraw funds for a nonqualified expense, you’ll be taxed on that money (which will be taxed as income), plus a 20% penalty. If you’re 65 or older, or disabled at any age, you’ll have to pay taxes on that amount, but you won’t have to pay the penalty. So after age 65, you can withdraw HSA funds for anything.

How can I create an HSA?

You must first sign up for an HDHP. If you take that step through your employer’s human resources department, they should be able to advise you on setting up your HSA.. Most employer-sponsored HDHPs have an associated HSA provider that you can work with.

If an HSA doesn’t come with your HDHP, you can create the account yourself. Banks, credit unions and brokers offer HSAs. Each HSA provider has their own terms. HSAs through a broker-dealer may allow you to invest your contributions in stocks, bonds, or funds.. Bank HSAs usually offer a great interest rate.

Once you select a provider, the enrollment process is pretty straightforward: You’ll be asked to complete an application with information about their HDHP. Once your account is approved, you’ll be able to put money into it and start using it for qualified expenses.

HSAs as savings and investment tools

HSAs offer a tax shelter. This can create the opportunity to accumulate capital gains that can be withdrawn tax-free for medical expenses. Investment options, of course, can become more important if you have a larger HSA balance.

Most HSA account holders will want to be somewhat conservative with these funds as they are intended for planned and unplanned medically necessary use. This may limit the types of investments an account owner may want to make with their HSA contributions to most low-risk products such as treasuries, municipal bonds, or high-grade corporate bonds.

The type of account selected will determine the type of investments that may be available. Plans provided through banks generally offer nothing more than high-interest savings terms. Brokerage plans, however, offer much more. Some of the main HSA investment platforms that you may be interested in learning about are: Vanguard, HSA Bank/TD Ameritrade, Lively, Optum Bank and Health Savings Administrators.

Who benefits most from an HSA?

HDHPs and HSAs often make the most sense for people who are relatively healthy with minimal expectations for annual health care costs. HDHPs usually offer lower premiums in exchange for higher deductibles that would have to be paid if an emergency arises. This is what makes the combination of an HDHP and HSA so beneficial. Plan owners can save indefinitely through an HSA for any emergency that requires a high-deductible payment.

HSAs and HDHPs may also appeal to high-income earners as well as individuals approaching age 65. High-income individuals who choose an HDHP can potentially use HSAs to save up to $8,100 per year in a tax-sheltered account. For both high-income earners and those nearing retirement, the HSA can be a worthwhile vehicle for building an emergency medical fund while also saving for an alternative type of retirement.

In contrast, keep in mind that if you incur high health expenses for standard medical care, the high-deductible health plan required to open an HSA might not be the right choice for you. Even if you pay less in premiums with the HDHP, it may be difficult—even with the money in an HSA—to meet the deductible for an expensive medical procedure.

Now that you know the requirements to have a health savings account, You must analyze your situation and start your procedures as soon as possible. Good luck!

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