As employers search for ways to lower their health care costs, they’re encouraging employees to sign up for a high-deductible health insurance policy paired with a health savings account. An HSA gives you a triple tax break: Your contributions are sheltered from income taxes, the money grows tax-deferred, and the funds can be withdrawn tax-free for medical expenses. It’s like a supercharged flexible spending account that never expires, and it can even serve as an extra retirement-savings fund. Most employers also add a few hundred dollars to the accounts each year as a bonus. Below we answer your questions about how HSAs work and how to make the most of them.
SEE ALSO: Contributing to a Health Savings Account
How do I qualify for an HSA? You need a high-deductible health insurance policy, whether it’s through an employer or on your own. In 2013, your deductible must be at least $1,250 for individual coverage or $2,500 for family coverage.
How much can I contribute? You can make pretax contributions (or tax-deductible contributions, if you’re on your own) in 2013 of up to $3,250 a year if you have individual coverage, or up to $6,450 if you have family coverage. People age 55 and older can save an extra $1,000 per year. You can add money to the account until the tax-filing deadline—April 15, 2013, for 2012 contributions.
How can I use the money? You may spend the HSA money tax-free on out-of-pocket medical expenses, such as your deductible, co-payments for medical care and prescription drugs, or bills not covered by insurance, such as vision and dental care. Most plans provide a debit card and an online bill-payment option.
Unlike with a flexible spending account, you don’t have to use the money by the end of the year—it can grow tax-deferred in your account for later use. There’s no deadline for making a withdrawal: You can reimburse yourself in future years for medical costs you incur now, as long as you have records of past bills. You can even use tax-free HSA money to reimburse yourself for the money that Social Security withholds from your benefits to pay for Medicare Part B. You can also use HSA funds to pay Part D or Medicare Advantage (but not medigap) premiums, or for a portion of your long-term-care insurance premiums. If you use HSA money for nonmedical expenses, you’ll have to pay taxes on it (plus a 20% penalty before age 65).
How do I invest the HSA money? HSA administrators typically offer savings accounts that are easy to access for medical expenses. But many also let you shift money into mutual funds and other investments after your account balance reaches a certain level.
Cigna, for example, offers HSAs through JPMorgan Chase and automatically invests the money in a savings account. But if your balance is higher than $2,000, you can shift the extra money into your choice of 36 mutual funds (you’ll have to pay a $2.50 monthly fee for the investments if your account value is less than $15,000).
Keep money you’re using for medical expenses throughout the year in the savings account, so you don’t have to sell investments at a loss to pay the bills.
Can I keep contributing to the account after age 65? You can keep your HSA at any age, but you can no longer make new contributions to the account after you have signed up for Medicare Part A or Medicare Part B. Some people over age 65 who are still working put off signing up for Medicare if their employer offers a high-deductible health insurance policy with an HSA -- especially if their employer contributes to the account. But if you work for an employer with fewer than 20 employees, or if you have already signed up for Social Security benefits, then you may be required to sign up for Medicare Part A and forgo making HSA contributions.
Do the tax benefits phase out at certain income levels?
Unlike many other tax breaks, there aren't any income limits. Anyone who buys a qualified high-deductible policy can open an HSA, as long as they have not yet signed up for Medicare.
If I set up HSA through my employer, what happens if I switch jobs?
You can keep the money in an HSA account even after you leave that job, similar to a 401(k). But you will get stuck with a 20% penalty -- plus an income-tax bill -- if you use any of the money for nonmedical expenses before age 65.
Is the Affordable Care Act changing HSAs? The health-care law boosts the penalty for nonmedical HSA withdrawals from 10% to 20% and prohibits tax-free withdrawals for nonprescription drugs (except insulin).
But the health-care law includes a related change that makes HSAs more attractive: It lowers the annual contribution limit for flexible-spending accounts (FSAs) to $2,500. So if you have a choice between an HSA and an FSA during open enrollment, you may want to switch to the HSA. Even though you may need to boost your deductible for the HSA, you’ll be able to set aside more pretax money and won’t have to drain the account by year-end.
Is preventive care covered by a high-deductible health insurance policy? Yes, and that’s another change caused by the health-care law. Even though your health insurance policy has a high deductible, most plans must cover certain preventive care without a deductible or co-payments. Services covered include well-baby visits and routine vaccinations for children; screenings for high blood pressure and high cholesterol; mammograms for women over 40 every one or two years, depending on their risk factors; and colorectal cancer screening for adults over age 50. For details, see the preventive services page at www.healthcare.gov.