You Now Have a Health Savings Account…So What Does That Mean?

So, your new health plan allows you to have a health savings account, or HSA. Nice to know, but what exactly is it, and what can you do with it?

HSAs can be a powerful tool for budgeting and may help save money on health costs. Find out the answers to common questions about HSAs below.

What is an HSA?

An HSA is a savings account that you can use to help pay for qualified medical expenses.

What’s the difference between an HSA and my regular savings account?

An HSA comes with three tax advantages that regular savings accounts don’t have. You can set aside money from your paycheck to your HSA before paying taxes on it, provided your employer offers this feature. You don’t pay taxes on the interest you earn on money in the account. You can use HSA funds anytime to pay for qualified medical expenses without incurring tax penalties.

Also good to know—some employers may contribute money to your HSA.

“Qualified” medical expenses? What are those?

HSA funds can’t pay for everything related to your health. Bandages, optional cosmetic surgery, gym fees—none of those are covered.

But vision care, dental care, prescription drug costs, copays for doctor’s visits or medication—your HSA money can help pay for most of it. Here’s a full list of what’s covered and what isn’t.

How do I actually spend the money?

Most plans provide a debit card linked to your HSA account.

How do I establish an HSA?

HSAs are typically offered with high-deductible health plans. These plans may require members to pay hundreds of dollars for their health care before their plan begins to help paying, so an HSA may be offered with the plan to help lessen the financial burden on members as they use health care services.

Usually, you’ll find out if your employer offers a health savings account during open enrollment. If you missed it then, you’ll need to figure out if you have a high-deductible health plan that will qualify you to establish an HSA. If your employer provides your health plan, check with your human resources department or plan administrator. If you buy your own health coverage, call the number on your health plan ID card or check your plan documents.

Generally: HSA-eligible plans have higher deductibles than most (at least $1,300 for individuals and $2,600 for families) and cap how much you have to pay each year in out-of-pocket costs ($6,550 for individuals and $13,100 for families).

I have some major medical expenses coming up. How much pre-tax money can I contribute to my HSA?

The IRS limits the amount of money you can put aside in an HSA each year. In 2017, individuals can deposit up to $3,400, and families can contribute up to $6,750. People over age 55 can put in an extra $1,000 in what’s known as “catch-up contributions” that can be helpful as they plan for health care expenses during retirement.

What happens if I contribute more than that?

Consult with your tax advisor, but you may have to pay income taxes on any extra funds that you put in the account. If your employer doesn’t include the excess contributions on your tax forms, you’ll have to report it under “Other income” on your tax return. In addition to your normal income tax rate, you may also have to pay an extra 6 percent tax on your extra contributions.

The bottom line? Know the limits of what you can contribute, and be careful not to go over that amount.

What happens if I don’t use all of the money I set aside?

The funds you’ve saved in your HSA will roll over from year to year and follow you from job to job. This roll-over benefit is one of the most popular features of HSAs as it offers members additional flexibility and peace of mind they don’t get from a “use it or lose it” flexible spending account.

Can I still use my HSA when I retire?

Once you enroll in Medicare, you will no longer be able to contribute new funds to your HSA. You can, however, continue using the funds you’ve already saved up for medical expenses.

One bonus of an HSA for people enrolled in Medicare: While using HSA funds to pay for health plan premiums is not allowed for people with employer-sponsored health plans or people under the age of 65 who purchase their own insurance, your HSA can pay for Medicare premiums.