What can I use the money in my HSA for?
You can use the money in the account to pay for any “qualified medical expense” permitted under federal tax law. This includes most medical care and services, and dental and vision care, and also includes over-the-counter drugs such as aspirin.
You can generally not use the money to pay medical insurance premiums, except under specific circumstances, including:
- Any health plan coverage while receiving federal or state unemployment benefits.
- COBRA continuation coverage after leaving employment with a company that offers health insurance coverage.
- Qualified long-term care insurance.
- Medicare premiums and out-of-pocket expenses, including deductibles, co-pays, and coinsurance for:
- Part A (hospital and inpatient services)
- Part B (physician and outpatient services.
- Part C (Medicare HMO and PPO plans)
- Part D (prescription drugs)
You can use the money in the account to pay for medical expenses for yourself, your spouse, or your dependent children. You can pay for expenses of your spouse and dependent children even if they are not covered by your HDHP.
Any amounts used for purposes other than to pay for “qualified medical expenses” are taxable as income and subject to an additional 20% tax penalty. Examples include:
- Medical expenses that are not considered “qualified medical expenses” under federal tax law (e.g. cosmetic surgery).
- Other types of health insurance unless specifically described above.
- Medicare supplement insurance premiums.
- Expenses that are not medical or health related.
- After you turn age 65, the 20% 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 20% penalty.
What are the advantages of HSAs? Security: Your high deductible insurance and HSA protect you against high or unexpected medical bills.
Affordability: You should be able to lower your health insurance premiums by switching to health insurance coverage with a higher deductible.
Flexibility: You can sue the funds in your account to pay for current medical expenses, including expenses that your insurance may not cover, or save the money in your account for future needs, such as:
- Health Insurance or medical expenses if unemployed
- Medical expenses after retirement (before Medicare)
- Out-of-pocket expenses when covered by Medicare
- Long-term care expenses and insurance Savings – You can save the money in your account for future medical expenses and grow you account through investment earnings.
Control: You make all the decisions about:
- How much money to put into the account
- Whether to save the account for future expenses or pay current medical expenses
- Which medical expenses to pay from the account
- Which company will hold the account
- Whether to invest any of the money in the account
- Which investments to make
Portability: Accounts are completely portable, meaning you can keep your HSA even if you:
- Change jobs
- Change your medical coverage
- Become unemployed
- Move to another state
- Change your marital status
Ownership: Funds remain in the account year to year, just like an IRA. There are no “use it or lose it: rules for HSAs.
Tax Savings: An HSA provides you triple savings: (1) tax deductions when you contribute to your account; (2) tax-free earnings through investment; and, (3) tax-free withdrawals for qualified medical expenses.
What happens to my HSA when I die?
If your spouse becomes the owner of the account, you spouse can use it if it were her/his own HSA. If you are not married, the account will no longer be treated as an HSA upon your death. The account will pass to your beneficiary or become part of your estate and subject to applicable taxes.
How do I open a health savings account?
Banks, credit unions, insurance companies and other financial institutions are permitted to be trustees or custodians of these accounts. Other financial institutions that handle IRAs or Archer MSAs are also automatically qualified to establish HSAs. If you cannot locate an institution willing to establish your account, check links under “Resources” on the United States Treasury Department website.