This article has been updated for the 2022 & 2023 tax years. A few years back, I moved from a traditional PPO health insurance plan to a high deductible health plan (HDHP) during open enrollment period. Why? I’m young, healthy, and I haven’t been to the doctor more than a few times in the last few years (knock on wood). As such, a HDHP offers me lower premiums than a traditional health insurance plan.
That was a huge selling point, but the other big selling point of the HDHP was the access it permitted to the HSA it is paired with (which my employer contributes to). HSAs are a key component to HDHPs, so it’d only be prudent to give more detail on what they are, how to use one, and what medical expenses are covered.
What is an HSA?
HSAs, or health savings accounts, are tax exempt accounts that allow you to contribute tax deductible funds that you can later use to pay for qualified medical expenses. Many HSAs come with a debit card that makes the payment and accounting easy.
Unlike with FSAs, you own the HSA and can take it with you when you leave an employer. And when you turn 65, you can use HSA funds on not just medical expenses, but anything, without penalty. That is why I think, matching aside, HSAs are the best retirement account (even though they are not thought of as a retirement account).
HSAs are very similar to traditional IRAs or 401Ks in many ways:
- you can contribute tax deductible contributions through your employer, much like a 401K.
- you can invest the funds in the account.
- there are annual maximums.
- your employer can contribute to the account.
- the entirety of the balance rolls over from one year to the next.
The main difference is that you can cover qualified medical expenses with the account. Many HSAs come with a debit card for you to use to cover these expenses.
What expenses does an HSA cover?
HSA Qualified Medical Expenses
There are a lot of medical expenses that you can use your HSA funds to cover. Some of the most common include dentist and doctor visits and procedures, flu shots, prescription drug costs or co-pays, laser eye surgery, eye exams, prescription eyeglasses and contacts, chiropractor, and birth control.
If you have any medical conditions that require special equipment or treatment, these expenses are typically covered as well.
For a full list of what medical expenses are covered by a health savings account, check out IRS publication 502. As a result of the CARES Act, OTC medications, telehealth, and menstrual care products are now considered qualified medical expenses.
What Expenses are not Covered by an HSA?
Publication 502 also has a list of items not covered as well. But two of the biggest expenses you may be wondering about are insurance premiums and over-the-counter drugs.
Generally, you cannot use your HSA to cover insurance premiums. There are some exceptions:
- COBRA premiums
- Medicare
- insurance premiums while you are unemployed
If it’s not in Publication 502’s covered list, you can probably assume it’s not.
Maximum HSA Contribution Limits
Much like IRAs and 401Ks, HSAs have annual contribution limit maximums that are adjusted every year with inflation.
The IRS maximum HSA contribution limits are:
2022 Maximum HSA Contribution Limits
- Individual Plan: $3,650 (+$50 over prior year)
- Family Plan: $7,300 (+$100 over prior year)
Note: The maximum HSA contribution includes both employer + employee contributions.
2023 Maximum HSA Contribution Limits
- Individual Plan: $3,850 (+$200 over prior year)
- Family Plan: $7,750 (+$450 over prior year)
Note: The maximum HSA contribution includes both employer + employee contributions.
As with 401Ks there is a catch up contribution for those age 55 and over. The 2022 and 2023 HSA catch-up contribution amounts are $1,000 for both single and family plans.
One big difference in HSA contribution maximums versus 401Ks is that any employer contributions must be subtracted from the maximum contribution, whereas employer 401K contributions are completely separate.
For example, if you have an individual plan and your employer contributes $1,000 to your HSA during 2023, the maximum amount you could contribute would be $2,850 ($3,850-$1,000), if you were under age 55 and not eligible for the catch-up contribution.
When is the HSA Contribution Deadline?
The HSA contribution deadline is the same date as the tax deadline. This means you have roughly an additional 3.5 months after the end of the calendar year to retroactively make HSA contributions.
Who is Eligible for an HSA?
In order to be eligible for contributions to an HSA:
- You must be covered under a HDHP, on the first day of the month of the contribution.
- You have no other health insurance coverage (excluding vision, dental, disability, accident, long-term care).
- You are not enrolled in Medicare.
- You cannot be claimed as a dependent on someone else’s tax return.
What Happens to your HSA when you Switch Plans? Can you do an HSA Rollover?
When you leave an employer or end your participation in an HDHP, the HSA belongs to you. HSAs can be rolled over from one HSA to another if you are trying to consolidate, much like IRAs can. You cannot roll over an HSA into an IRA or 401K. You can do an IRA to HSA rollover, but the rules make it fairly limiting.
Contributions made to an HSA belong to the participant immediately, regardless of who contributed (you or employer).
If you move back to a traditional insurance plan and stop using an HDHP, you can still use your HSA funds to cover qualified medical expenses.
HSA Vs. FSA: What’s the Difference?
If you’ve had an FSA in the past or are considering one, you are probably wondering how FSAs differ from HSAs. There are a few key difference between HSAs and FSAs.
- You own an HSA, your employer owns the FSA.
- You can carryover all HSA funds from one year to the next, the FSA carryover rule is very limited.
- You can invest funds in an HSA, you cannot with an FSA.
- Contributions maximums between the two differ, but HSAs are generally higher.
- Employers often offer HSA bonus incentives, but I have not seen this with FSAs.
Given all the advantages, you may be wondering if you can transfer funds from an FSA to HSA, which would also potentially help avoid the FSA “use it or lose it” rules. Unfortunately, the IRS does not permit this.
Can you Contribute to an HSA Outside of an Employer Payroll Deduction?
Yes, you can contribute to an HSA outside of an employer. And the same tax deductible benefits apply, you just won’t be able to fully realize them until you do your taxes for the year.
Can you Front-Load your HSA Contributions?
You can, but the decision of whether or not to front-load your HSA contributions in the beginning of the year has some nuances. If you have upcoming expenses and plan to keep your HDHP throughout the year, it could pay off. Otherwise, it can create a bit of a mess to clean up in order to avoid taxes and penalty.
Where Can I Open an HSA? What is the Best HSA Account to Transfer to?
HSA accounts cannot be found at all of the typical online brokers (Fidelity has HSAs as the exception). I’ve combed through hundreds of HSA accounts, fees, and investment options to make a list of my picks for the best HSA account. Have a look – it’s easy to transfer funds from your current HSA provider (even if it is through your current employer and you still have the HSA open with them). You can transfer funds any time. Not all HSAs are created equal as you’ll find in that article.
More Health Savings Account Info?
Check with your employer, as details around what they will contribute, HDHP premiums, and other factors may vary.
Also, check out IRS publication 969 for more on HSAs. Also, check out my previous HDHP post for tips on determining if an HDHP makes sense for you.
Do you have an HSA? How has it worked for you?
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