FAQ
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I’ve had a plan like this in the past, and it was a “use-it-or-lose-it” plan—I lost any funds I didn’t use by the end of the year. Is an HSA like this? So who can contribute to my HSA? Can I make contributions to my HSA through payroll deductions? So does my HSA save me on sales tax? Can I pay my premiums with an HSA? What happens if I stop using a High Deductible health plan? Do I lose my money? If I leave an HDHP plan mid-year, is my annual contribution limit affected? What if I start an HDHP late in the year – is my contribution amount pro-rated? What if I accidentally over-contribute to my HSA? My HDHP covers preventative care. Does that make me ineligible to have an HSA? What can I pay for with my HSA? Can I pay for older health expenses with my HSA? Are there fees to have an HSA? Can I pay for my HSA bank fees out of my HSA? What happens to my HSA if I die? I’ve had a plan like this in the past, and it was a “use-it-or-lose-it” plan—I lost any funds I didn’t use by the end of the year. Is an HSA like this? Relax—no use-it-or-lose it rules for HSAs. Actually, you’re making a fairly common (and understandable) mistake. The plan you’re thinking of is called an FSA, or Flexible Spending Account. FSAs are like the cranky old grandfather of HSAs—they provide tax-free money for eligible medical expenses, but guess what? Your employer gets to keep any funds you contribute but left unspent in the FSA at the end of the year are forfeited, or lost. So how’s an HSA different? First, there’s no use-it-or-lose it rule—you always keep your unspent funds. Secondly, you don’t have to go through your employer to get an HSA, but you can’t have an FSA if your employer doesn’t offer it. Thirdly, you can take the account with you when you change jobs. And lastly, money in your HSA earns interest. FSAs are great if you know EXACTLY what you’ll spend each year in medical expenses, but they’ve definitely been trumped by the younger, savvier HSAs. Such is life. I’m diabetic, so I have high medical costs each year. I also work for myself. Is an HSA right for me? An HSA is great for you. First off, the right HDHP plan is going to give you a huge premium savings over those ridiculous premiums you’re paying now. You might look for a plan with 100% coverage after the deductible—this means you’ll know exactly how much you’ll pay each year, because once you hit that deductible, you won’t have to fool with co-insurance. Secondly, your HSA is going to help you shave off a huge portion of tax savings each year by letting you pay for those medical expenses with tax-free dollars. Your exact amount will depend on your tax-bracket, but you can estimate that you’ll save at least 25% on every dollar. A quarter on every dollar—not bad, right? And finally, since you’re self-employed, your HSA is a perfect way to save! The money you accumulate in your HSA will move with you wherever that job takes you—a new state, fame and fortune, lucrative corporate buy-out…whatever happens, your HSA stays with you, and you keep reaping those tax benefits. Need to see some numbers to help it sink in? Check out our example of Joe Six-Pack when he has a big year of medical expenses! So who can contribute to my HSA? Obviously, you can contribute to your own HSA. But so can your employer—a useful benefit that’s becoming extremely popular. And actually, ANYONE can contribute to your HSA: your parents, your Aunt Sally, your physical trainer, or any generous stranger you meet on the street (lucky you!). Just remember: every contribution—no matter who it comes from—contributes to your annual maximum. So make sure that you’re generous stranger doesn’t push you past the limit (because you’ll be the one to end up paying taxes and the 6% penalty on the overage amount). Whenever. Do it in small deposits throughout the year or in one lump sum on any special date you choose. It’s your party. Do it up however you like. Got a big stash to stick away in your HSA? Remember to do it sooner than later so you take advantage of time—the longer your money is in the HSA, the more it can earn. Can I make contributions to my HSA through payroll deductions? Gold star question! YES, if your employer allows, you can definitely make HSA contributions via payroll deductions. In fact, you absolutely SHOULD do this if it’s available. Not only is it easier, but you also get another great tax benefit. How? Because payroll deductions are made through your employer’s cafeteria plan. A cafeteria plan is an employer-sponsored plan that allows the cost of benefits to be deducted from your salary before taxes are taken out. So not only do you get your regular income tax savings, but these payroll deductions are also exempt from FICA taxes—which totals another 7.65% savings on every dollar contributed. Maximize your savings by taking advantage of this great benefit, and encourage your employer to allow HSA contributions through a cafeteria plan!
No one likes doing taxes (except accountants, we guess), and most people—us included—find the whole process a bit confusing. Luckily, the tax benefit of an HSA doesn’t take an accountant to understand. All the money that you contribute to your HSA NOT made via payroll deductions is considered after-tax funds. This is because you were already taxed for this income on your paycheck (you know, that “Income Tax” line on your pay stub that you always try to forget about. Sorry to bring it up). So since you’ve already paid tax on these after-tax funds, you take what is known as an above-the-line deduction when you file your taxes each year. Above-the-line deductions adjust your gross income, meaning that if you contributed $1000 worth of after-tax funds to your HSA and made $40,000 this year, you’d only be taxed on $39,000. Nifty, eh? And just to ease your mind, reporting your HSA for tax purposes is pretty easy. You don’t have to itemize every contribution in order to file—all you have to do is write your contribution total on the designated line of your 1040 form. You’ll also attach the short HSA-specific Form 8889—and you’ll fill this out with the help of a handy document called Form 1099 SA, which your HSA bank is required to send you. Or you can give the 1099SA to your tax accountant and let them deal with it. So does my HSA save me on sales tax? Sorry, buddy—no luck there. You save on your income tax (which is a MUCH bigger tax, anyhow), but you’ll still pay sales tax when you buy eligible expenses. Can I pay my premiums with an HSA? The IRS states that health insurance premiums aren’t eligible expenses. However, they do allow for you to pay for premiums in a few extraordinary circumstances, including:
I thought I heard once that the annual maximum contribution limit was capped at my HDHP deductible. What’s the deal? Oh, that old rule? That’s ancient history. Congress got rid of that stupid rule back in January of 2007. You can contribute as much as you want up to the full Annual Contribution Limit, no matter what your HDHP deductible is. Welcome to the future. What happens if I stop using a High Deductible health plan? Do I lose my money? If your insurance coverage changes to anything other than an HSA-Qualified HDHP (and just why would you want to do something like that?!), then the IRS states that you can no longer make contributions to your HSA. But here’s the good news: any funds remaining in your HSA will remain there and you can continue to spend them tax-free—regardless of your insurance plan. And when you come to your senses and come back to a qualified HDHP, you can start making contributions again. If I leave an HDHP plan mid-year, is my annual contribution limit affected? Yep. If you leave mid-year, your contribution limit is pro-rated according to the number of months you’re covered by an HDHP on the first day of the month. So, let’s look at an example. Let’s say Dan is covered by a family HDHP – his annual maximum for HSA contribution is $5,650 for 2007. If Dan is covered by the HDHP for four months of the year (from January 1st to anytime in April after the 1st), Dan can only contribute four twelfths of the maximum contribution. Check out our math skills. That’s $5,650 divided by 12, which equals $470.83 each month. Multiply that by 4 (for the four months Dan was covered), and you get 1883.33—and there you have Dan’s maximum contribution for the year. What if I start an HDHP late in the year – is my contribution amount pro-rated? Nope—you get special rules in this case. The IRS allows you to contribute all the way up to the annual maximum limit. However, you have to keep HDHP coverage for a full 12 months of the year following. What if I accidentally over-contribute to my HSA? No problem. Simply take out the overage amount plus any income it earned while in the account before tax time. Remember, any overage amounts in there when you file your tax return are taxed as normal income AND charged a 6% excise tax. It’s easy to avoid, so just make sure you check that HSA contribution total before filing your taxes. My HDHP covers preventative care. Does that make me ineligible to have an HSA? Nope – IRS rules state that insurance carriers can pay for preventative care services before the deductible. Makes sense, too—if the purpose of HSAs and HDHP is to encourage people to become better consumers and stay healthier, it makes sense to encourage people to have regular preventative exams. Preventative care includes things like periodic health exams, routine pre-natal and well-child care, and regular screenings for things like breast and colon cancer. Every plan is a bit different, so consult your benefits summary or insurance carrier for the whole menu. What can I pay for with my HSA? Just about everything related to your health — the list, actually, just goes on and on. Check out the HSA Rules page for a quick primer, or take a look at our List of Eligible Expenses for the long version. Or, if you’re one of those people who just love sorting through tax documents, you can sort through the official tax code for HSAs at www.irs.gov. (Good luck with that!)
Can I pay for older health expenses with my HSA? You can pay for any health expenses that occur during the time that you have the HSA open and are covered by an HDHP. Any bills for service performed before you opened the HSA are not eligible to be paid with your HSA. Nice try, but no cigar.
This depends on your bank. Just like checking and savings accounts, some banks charge set-up fees, some don’t. Some charge you to have checks, some have monthly fees, some charge you to have a debit card. If you’re opening an HSA, feel free to shop around and find the bank with the benefits you like the best—and keep your investment options in mind! Can I pay for my HSA bank fees out of my HSA? Yes. (That’s our shortest answer!) Can I borrow against my HSA? No. (Even shorter!) What happens to my HSA if I die? When you setup your HSA, you’ll name a primary and secondary beneficiary. Any money left in your HSA when you die will become the property of the beneficiary. |