How Does A Health Savings Account Work?

How Does A Health Savings Account Work?

What is a Health Savings Account?

A Health Savings Account, or HSA, is a special type of bank account in which funds that are contributed are tax deductible and can be used to pay for qualified medical expenses.

Who is eligible?

To be eligible for an HSA account, you must have a high-deductible health plan. A high deductible health plan (HDHP) is a health plan that meets the deductible and out of pocket requirements established by the IRS for HSA-qualified plans, and that doesn’t cover anything besides preventive care before the deductible is met. In other words, you’ll pay the full cost of office or specialty visits until your deductible is met, rather than just a copay amount.

What can the funds be used for?

Qualified medical expenses include prescription medications, health insurance deductible payments, dental expenses, eye exams, and even alternative care you insurance may not cover. Although the HSA is an individual account, you may use it to pay medical expenses of your spouse and dependents. HSA accounts are set up with a special custodian, usually a bank or credit union.

You can take funds out of your HSA to use on non-medical expenses but you will pay a penalty as well as tax on the income.

What are the contribution limits?

For tax year 2019, the contribution limits are $7,000 for a family or $3,500 for a single taxpayer. If you are over 55, you can contribute an extra $1,000. You can contribute funds for the current year up until April 15, 2020.

How are the funds taxed?

If you hold your health insurance and HSA plan through your employer, you may have the option for automatic deductions from your payroll, which are not subject to income tax or FICA (Social Security and Medicare) tax. Any interest or investment returns grow tax-free in the account.

If you contribute outside of the payroll system, you will report the contribution as a deduction on your income tax return.

 

To learn more about HSA plans visit https://www.irs.gov/publications/p969