Many questions are being asked about Health Savings Account, or HSA’s, and I thought it would be a good idea to briefly explain what they are and how they work.  To begin, do not confuse a Health Savings Account (HSA) with a Flexible Spending Account as they are totally separate from each other and are governed by a different set of rules and regulations.  Our discussion below is going to focus solely on Health Savings Accounts.

What is a Health Savings Account or HSA?

A Health Savings Account is an account that is set up to help you pay for out of pocket medical expenses on a tax favored basis.  In other words, pre-tax dollars are used to fund the account.  It is set up in conjunction with a high deductable medical insurance plan and can not be a stand alone program.

How do I set up a Health Savings Account or HSA?

A Health Savings Account is set up at the time you choose a high deductable medical insurance plan and is usually established through the insurance carrier with a bank or credit union.

How do I fund my Health Savings Account or HSA?

Your HSA contributions are paid monthly along with your medical insurance premiums and accumulate in your HSA account.  Interest is usually paid on the account based on the account balance.

How do I access the funds in my Health Savings Account of HSA?

You will normally be issued a PIN protected MasterCard or Visa debit card that is associated with your account.  This card would then be used to directly pay any out of pocket expenses at the point of sale.

What expenses can be covered with my Health Savings Account of HSA?

You may use your HSA debit card to pay for any “qualified medical expense” including co-pays, insurance deductibles, prescriptions, over the counter medications, dental and vision expenses to name just a few.

What happens if I don’t use all the money I put in my HSA by the end of the year?

Unlike Flexible Spending Accounts, any money that is not spent during the year is not forfeited but is rolled over and continues to earn interest as it accumulates.  As long as the money is withdrawn for qualified uninsured medical expenses, no tax liability is incurred.

Can I access the money for non-medical expenses if needed?

Yes, but any amounts used for purposes other than to pay for “qualified medical expenses” are taxable as income and subject to an additional 10% tax penalty. After you turn age 65, the 10% additional tax penalty no longer applies. If you become disabled and/or enroll in Medicare, the account can be used for other purposes without paying the additional 10% penalty.

It is important to note that since HSA’s are funded by pre-tax dollars, the IRS sets the guidelines and requirements to be considered a qualified HSA.  Minimum deductibles and out of pocket expenses are specified each year by the IRS and adjusted to take in to account the cost of living increases from year to year.  In addition, guidelines exist for how much can be put in to these accounts on an annual basis.  Please contact your professional advisor or the benefits department at Big Mouth Consulting for further details.

This blog is not intended as tax advice and is a plainly worded explanation of HSA’s.  It is not intended as tax advice and you should contact your professional advisor or accountant for a detailed explanation to see if a Health Savings Account is right for you.