What Are Health Savings Accounts?

Ruth Jenkins
Ruth Jenkins
President & CEO

Q: What is a HSA?

A: Health Savings Account. It is a tax-deferred savings account to save for immediate or future medical expenses.

Q: What makes a HSA tax-preferred?

A: 1. Health Savings Accounts contributions made by the account owner are not taxed.

    a. Please consult your tax advisor for more information regarding tax benefits available to you by opening a HSA.

Q: Can anyone open a HSA?

A: 1. Due to the tax-preferred status, the IRS specifies that in order to be eligible for a HSA, you must have a High Deductible Health Plan (HDHP).

2. A HDHP has a higher annual deductible than typical health plans and a maximum limit on the sum of the annual deductible and out of pocket expenses. Check with your provider to determine if your plan meets the HDHP criteria.

Q: What are important factors in deciding which HSA to choose?

A: 1. Like many other financial products and accounts, you should pay close attention to the fee structure of the account.

2. Because the IRS limits the amount you can save each year, you want to be certain that your health care funds are preserved for health care and not bank fees.

    a. According to our research, many banks charge an account fee between $2.50 and $4.25 per month. Several charge a fee of $2.00 every time you use your debit card at POS with a PIN or for any ATM withdrawal. Many even charge an account closing fee of $25. These fees can make a substantial impact on your account balance.
    b. At HFCU, our HSA has no monthly fees, no charges at POS and no charges for ATM withdrawals using our Alliance One network.
    c. Additionally, many of the banks require a minimum balance of $5000 to be eligible for any interest accruals. At HFCU, we offer 1.75% APR with no minimum balance requirements.

Q: I wish I could shop for a HSA with lower fees, but my employer makes a contribution to my HSA so they choose what financial institution I must use for my HSA. Do I have any options?

A: Absolutely!
1. Similar to rules for IRA accounts, an individual may have multiple accounts as long as they do not exceed the annual contribution limits. The IRS allows for unlimited transfers between HSA accounts that do not affect contribution limits.

    a. This means that you can have the HSA at the bank designated by your employer and accept the employer contributions and even your own payroll contributions to that account but then periodically transfer those funds to your HSA at another financial institution such as Heritage Federal Credit Union.

Q: If my employer doesn’t offer a HSA, how can they learn more about this healthcare insurance option?

A: At HFCU, we have consultants that would be happy to talk with the company’s Human Resource representative. They can explain all about the benefits involved and can help to set up an informative meeting with employees to help them understand their options.

Q: Am I allowed to open another HSA at any time or only during open enrollment?

A: You may open a HSA at any time that you meet the IRS guidelines discussed earlier, but assuming you have met those, you may open an additional account at any time.

Q: How do I access funds in my HSA?

A: At HFCU, we offer a variety of HSA payment options:

1. HSA debit card and checks
2. Online banking and mobile app services

    a. View balances
    b. Set up iPay bill pay
    c. Visit any branch location

Q: Is it true that a HSA is “Use it or Lose it?” meaning that I must spend everything that I save this calendar year or the money is no longer available to me?

A: NO! This is one of the misconceptions of the HSA where it is confused with another type of tax preferred account, the Flexible Spending Account (FSA).

1. With a HSA, YOU are the owner of the account. Once the money is in the account, you have the sole authority over the money.

    a. You may choose to pay claims directly from your account.
    b. Or, pay claims out of personal funds and then take periodic distributions up to the amount of claims to pay yourself back.
    i. Distributions to pay yourself back can even be several years after the claim is incurred and paid.
    1. As long as you have documentation to show that the claim occurred while you were covered by an HDHP and the claim had not been previously reimbursed from another source and/or taken as an itemized deduction in any year.

Q: What are considered qualified medical expenses that allow tax-free withdrawals?

A: 1. The best source for specific information can be found at
IRS.gov website and are the same expenses that would generally qualify for the medical and dental expenses deduction when filing annual tax returns.

    a. Expenses such as prescription medications, doctor visits, hospitalization costs, and medical devices are just a few examples.
    b. You may also typically use the funds for dental and vision costs as well.
    c. Additionally, in some circumstances you may use HSA funds to pay for insurance premiums such as:
    1. Long-Term care insurance
    2. Health care continuation coverage such as COBRA
    3. Health coverage while receiving unemployment insurance compensation and also Medicare or other health care coverage if you are 65 or older.

Q: Can HSA’s be used to pay for Medicare premiums?
A: This is a question that is best answered by a qualified tax advisor. Generally, though, Medicare and other health care coverage can be treated as qualified medical expenses as long as you are 65 or older.

1. Note: When individuals turn 65 and begin Medicare coverage, they no longer are allowed to contribute into a HSA. This is because you generally cannot have any health coverage other than an HDHP in order to contribute to a HSA.

Q: If I have sole authority over the funds in my HSA, what happens if I use the funds for a non-medical expense?

A: 1. On your annual tax return, you must report the total dollar of HSA deposits and withdrawals for the year and attest that all withdrawals were for qualified medical expenses.

2. Any non-qualified expenses are subject to income tax and an additional 20% tax/penalty.

    a. You must keep records and/or receipts sufficient to show that the distributions were exclusively to pay or reimburse qualified medical expenses.
    b. These receipts should be kept with your tax return records in the event of an IRS audit, but are not required to be submitted annually to the IRS to protect your private health information.

Q: Can HSA’s be rolled over or transferred?

A: 1. Rollovers and transfers are generally not subject to the annual contribution limits.
2. Individuals must roll over the amount within 60 days after the date of receipt. An individual can make only one rollover contribution to an HSA during a 1-year period.
3. If an individual instructs the financial institution (trustee) of their HSA to transfer funds directly to the trustee of another of their HSA’s, the transfer is not considered a rollover. There is no limit on the number of transfers allowed.

Q: I have heard mention of a HSA as part of the retirement planning process. How does a HSA affect retirement planning?

A: There are two components of the HSA that provide excellent options in retirement planning.

1. First, the funds can be used to pay for COBRA expenses.

    a. This may allow you to retire prior to eligibility for Medicare and use your pre-tax funds to pay for your coverage without causing you to take larger distributions from your IRA, 401k, or other retirement savings vehicle.

2. Secondly, funds in the HSA grow tax-free and can therefore be withdrawn tax-free to cover medical expenses in contrast to other retirement accounts that have taxes due upon withdrawal.

    a. Knowing that medical expenses often increase substantially in the retirement years, using funds that are specifically set aside for medical and are also tax-free, can help you preserve your retirement funds.
    b. For those individuals interested in using a HSA to help with retirement planning, they will often choose to not take distribution from the HSA to pay for smaller claims as they arise, instead opting to pay out-of-pocket and help grow the balance of the HSA because it is not required to take a distribution when a claim is incurred.
    c. Similarly, receipts for qualified expenses may be turned in many years later.
    i. For instance, if you pay $1000 in services today, you could save receipts to turn in 10 years from now when you are retired and want some quick, not-taxable income.

d. For more information regarding this area, a Heritage Financial representative would be happy to discuss it with you. You can reach them at 812- 253-6928 Ext. 2453.