Since HSAs are tax-favored accounts created by the IRS, they are subject to a few basic tax rules. These rules are updated annually to keep up with inflation. And believe it or not, these rules have actually made HSA’s even better over the past few years. You’ll always find the most current updates right here on HSAEducator.com. Check back often, because these rules are updated about once a year, and nothing’s more useful during a pregnant pause in conversations at cocktail parties than an up-to-date knowledge of tax rules.
In order to open an HSA, you must be “HSA Eligible.” IRS guidelines say that an HSA Eligible Individual is anyone who:
- Is under age 65 and not entitled to Medicare
- Is covered by an HSA-qualified High Deductible Health Plan (HDHP) (more on this later — or if you’re just dying to jump ahead, click here…)
- Cannot be claimed as a dependent by another person
- Isn’t covered by some sort of additional, non-HDHP insurance program
Annual HSA Contributions
The IRS sets limits for how much you can contribute to an HSA in each calendar year. It’s in your best interest to follow these rules, as over-contributing to your HSA leads to a 6% tax penalty on excessive funds and having these overage funds taxed as normal income on your tax return. This is a total limit, so if your employer or anyone else contributes to your HSA, make sure any funds you deposit don’t roll past the annual limit! (For what to do if you accidentally go over the limit, check out our FAQ Section.)
For 2011 and 2012, the IRS has set the following Annual Contribution limits:
Single/Self-Only coverage: $3,050 for 2011 and $3,100 for 2012
Family Coverage: $6,150 for 2011 or $6,250 for 2012
HSA owners age 55 and older and who are not enrolled in Medicare can make additional contributions to their HSA called “catch-up contributions” (or, as we sometimes write just for kicks – “ketchup contributions.”) For 2011 and 2012 the allowed catch-up contribution is $1,000.
Like we said earlier, HSA dollars spent on “qualifying medical expenses” remain tax-free. The good news is this: a lot of expenses qualify.
We could spend all day (literally) listing off all the HSA-eligible medical expenses out there, and you’d probably sit there completely bored with the occasional laugh at funny sounding medical procedures like “rolfing”. So we’ll give you an overview. Eligible HSA expenses include all your major medical expenses, like:
- doctor visits
- specialist visits (like chiropractors, dermatologists, and mental health specialists)
- hospital visits
- prescription drugs
- lab tests
- ambulance rides (medical only – no paid joyrides)
- smoking cessation programs
- diabetic supplies
- surgery fees
- fun stuff like acupuncture
- therapy equipment
- and more.
Your HSA will also pay for non-cosmetic dental and vision expenses, like teeth cleanings, eyeglasses, regular dental cleanings and eye exams, and contact lenses—and even your contact lens solution! Unfortunately, starting in 2011, over-the-counter drugs, like cough syrup, pain relievers, and allergy medication were no longer HSA qualified expenses. And no, your HSA won’t cover that gold tooth or tattoo you always wanted. You are on your own for those.
To see a more complete list of eligible expenses, take a look at our List of Common Expenses PDF.
And finally, your HSA dollars cover the expenses of you, your spouse, and your dependents – even if you only have self-only insurance coverage!
Using Your HSA for Non-Eligible Expenses
Is it possible to use your HSA to buy non-eligible medical expenses? Yes. Is it a good idea? Not really. IRS rules state that HSA funds used to pay for non-eligible medial expenses are taxed as normal income on your income tax filing, and are charged a 10% excise tax as well. So you lose the tax benefit and get charged an extra 10%. Please note, in 2011 the excise tax on early withdrawal increased from 10% to 20%. So while it may be tempting to buy that six pack, or (better yet) a new sports car with your HSA money, we recommend you use another method of payment. Or—wait until you’re 65 (read on for the good news)!
HSAs At Age 65
Health Savings Accounts are designed to help you put away more money for those golden years of retirement. At the age of 65, you will no longer be subject to the excise tax for non-medical expenses, and will only be required to report those funds as a part of your income. And, you keep all those other great HSA tax benefits. So, at age 65, it makes better financial sense to buy that sports car with the HSA money you saved up, just pay your regular taxes on it, and drive in style while showing off your “good financial sense”. Hey, you’ve earned it.