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How to Know If You’re Eligible for a Health Savings Account

By Brian Acton

Health savings accounts (HSAs) are savings plans that can be used for current and future medical expenses. They can be used to pay for all kinds of medical expenses, including doctor visits, hospital stays, prescription and over-the-counter drugs, and even medical supplies like those offered at Core Products.

HSAs offer a number of benefits similar to flexible spending accounts (FSAs), but have a number of specific tax advantages. But only individuals with specific types of health insurance plans, called high deductible health plans (HDHPs), can participate in HSAs.

The Benefits of HSAs

The advantages of using HSAs are numerous. All contributions to HSAs are completely tax-deductible, and remain tax-free as long as you withdraw them to pay for eligible medical expenses. Some HSAs gain interest on contributions, while others can be invested similar to retirement accounts. All interest and investment earnings are tax-deferred and remain tax-free as long as they are used for eligible medical expenses.

Unlike FSAs, your contributions to HSAs can be held throughout the years, and you can continue to use your existing HSA contributions even if you switch jobs or insurance plans.   

How to Know If You’re Eligible for an HSA

You are only eligible to participate in a HSA if you or your family is solely covered by a qualifying HDHP. This year, a HDHP is defined as any plan with a deductible that falls within the following range:

 

Individual Coverage

Family Coverage

Minimum Annual Deductible

$1,350

$2,700

Maximum Deductible and Out of Pocket Expenses

$6,650

$13,300


If your health plan’s annual deductible meets the above criteria, you are eligible to participate in a HSA. However, you may be disqualified for the following reasons:

  • You are also covered by Medicare or a spouse’s health plan
  • You receive certain types of government benefits
  • You are covered by a FSA
  • Someone else claims you as a dependent on their tax return

Using a HSA

If you are eligible to participate in a HSA, you can probably set one up directly through your employer or insurance provider. However, you can also open HSAs with banks, insurance agents, and other third parties.

Once your plan is set up, you can make automatic contributions from your paycheck or contribute to your plan whenever you have a little extra money. For this year, the contribution limits are:

 

Individuals

Families

Participants Under 55

$3,450

$6,900

Participants 55 and Older

$4,450

$7,900


Some employers contribute to their employees’ HSAs, so check if your employer offers that benefit. You can also make a one-time contribution to your HSA from an IRA investment account, up to the annual maximum.

Depending on the plan type, you can use the contributions to gain interest tax-free or invest the funds in investments. Remember, you don’t lose your contributions year to year. Some people use the HSA as a way to save for retirement.

When using your HSA funds for eligible medical expenses, you may need to save receipts, and get a letter of medical necessity (LOMN) from a doctor for certain expenses. You can check the list of eligible expenses with your HSA administrator. 

If you withdraw funds for a non-eligible expense, you can expect to pay taxes and a 10% penalty. Once you turn 65, you can make penalty-free withdrawals for any reason, though you will still have to pay taxes on the withdrawals not used for medical expenses.

Sources:

http://www.hsacenter.com/what-is-an-hsa/
https://www.irs.gov/publications/p969
https://www.investopedia.com/university/how-hsas-work/how-qualify-contribute-hsa.asp

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