WHAT IS AN HSA (HEALTH SAVINGS ACCOUNT) AND HOW DOES IT WORK?
A health savings account (HSA) is a health savings account with tax benefits and investment opportunities. You can use it to pay for certain medical expenses that your health insurance may not cover, such as naturopathic care, crutches or fertility treatments.
To contribute to an HSA, you must be enrolled in an HSA-qualified High Deductible Health Insurance Plan (HDHP). HSAs are not only a smart way to pay for medical bills like deductibles and coinsurance, but they are also increasingly being used as part of a retirement planning strategy.
However, due to tax advantages, there are many rules about who can create an HSA, who can contribute money to an HSA, and what that money can be used for. If you don't follow the rules, you will lose tax benefits and have to pay additional penalties.
HOW DOES AN HSA REDUCE MY TAXES?
If you manage your HSA correctly and follow all IRS rules, your HSA contributions are:
Pre-tax - these contributions will not be taxed as income
No tax on interest earned (through investment or interest income)
Not taxed if you take it out of the HSA to pay qualified medical expenses
Here's how it works: The money you put into your HSA is before taxes. If your employer contributes to your HSA, that money doesn't count as income, so you won't pay any taxes on it.
Interest and investment income in your HSA is deferred for tax purposes just like an IRA. Because you don't pay the growth tax every year, you keep more money in the account and the account grows faster. And there is no "use or lose" rule for HSAs. If you don't need to withdraw the money to pay medical bills, it just stays in the account and carries over from year to year. Therefore, it is possible to accumulate a large amount of savings in an HSA if you make consistent contributions and do not have to make withdrawals.
When you take money out of your HSA to pay for eligible medical expenses, you don't have to pay income taxes. However, if you take money out of your HSA but don't use it for medical bills, you'll have to pay income tax plus a 20% penalty (which was 10% before, but the Affordable Care Act raised it to 20%).
After you turn 65, the rules are a little different. If you have Medicare, you will no longer be able to contribute to your HSA. However, you can still use the money you saved in your HSA. Unlike before age 65, you can spend your HSA money on whatever you want and you won't have a 20% penalty. However, you will have to pay taxes on HSA withdrawals that are not used for medical expenses. If you take money out of your HSA and use it for qualified medical expenses, you will not pay regular income tax. It is completely tax free.
PENALTIES AND TAXES
You pay all penalties when you file your tax return. The penalty is 20% of the amount you spent for non-qualified expenses. You should also report these expenses to the IRS yourself using Form 8889 to avoid possible future audits.
WHAT CAN I USE MY HSA FOR?
You can only use the HSA to pay for eligible medical expenses. The IRS calls them the cost of diagnosing, curing, alleviating, treating, and preventing disease. The full list can be found on the IRS website.
Your payments include medical benefits and preventive care, not only from doctors and surgeons, but also from dentists, optometrists, and mental health professionals.
Other HSA qualification costs include:
Treatment of alcoholism and drug addiction
Smoking cessation programs (but not products)
Weight loss programs
Glasses and contact lenses
Chronic long-term care services and a limited number of premiums for long-term care insurance
Birth control pills
Sterilization as a vasectomy
Auto expenses such as gas, parking fees, and tolls when used for qualified health care and services
Not all medical expenses are qualified. The main things to remember are over-the-counter medicines and future medical bills. Therefore, you cannot make advance payments that will be billed to you later.
Typically, your HSA cannot cover anything that promotes your overall wellness, unlike treating a specific condition.
These are some medical expenses that are not covered by the HSA
Vitamins and nutritional supplements
Gym membership or other gym fees
Life insurance premiums
Gum and nicotine patches
QUALIFYING FOR AN HSA
You must have a high deductible health insurance plan (HDHP) to open an HSA account. For 2021, this is a health insurance plan with a minimum deduction of $1,400 for individuals or $2,800 for families.
If you're enrolled in Medicare, have someone else's health insurance, or if someone claims they're a dependent on a tax return, you're not eligible for an HSA. Your doctor will tell you if your plan qualifies for an HSA. Otherwise, you can open one yourself. Health insurance accounts can have a maintenance fee, whether you have one with your health insurance company or create one.
CONTRIBUTION TO AN HSA
With an HSA, others can contribute to your account. This means that employers, family members, and others can fund your account too.
You can also transfer money from an IRA to your HSA with a single transfer. Just make sure you stay within the contribution limits set by the IRS.
The following contribution limits apply to the HSA for 2020:
WHO HOW MUCH
Individuals $ 3,550
Families $ 7,100
Age 55 and older $1,000 catch-up contributions
Catch-up contributions are additional contributions that you can make beyond normal limits.
The end of contributions for HSAs begins when you enroll in Medicare (usually 65). From that point on, you will no longer be able to fund the account.
USING YOUR HSA ON SUPPLEMENTAL & NATUROPATHIC CARE
Treatments such as massage and acupuncture are often used as supplemental treatments alongside more conventional treatments for conditions such as pain management. For these types of treatments however, your doctor will need to provide you with a letter of medical necessity (LMN). This letter should state the actual diagnosis and how the specified treatment can help treat the problem. For specific qualified expenses and information on the requirements of a letter of medical necessity, you should contact a tax professional.
These following treatments are the most common uses of an HSA in tandem with an LMN:
As mentioned, you can't just get a massage and count it as a qualified medical expense. It should be used specifically to treat actual illness or injury. This includes anxiety, depression, high blood pressure, diabetes, chronic fatigue, and fibromyalgia. In your LMN, the doctor should also indicate the duration of treatment or number of sessions required.
Acupressure and Acupuncture
Acupuncture is an ancient Chinese medical technique that uses needles to balance energy flow and treat illnesses, most often pain. The needles are generally painless and can even help relieve muscle tension, like a massage.
Acupressure is similar to acupuncture, except that there are no needles involved. The doctor presses certain pressure points (also called acupuncture points) on certain areas of the body. It is said to help restore balance to the body.
Acupuncture or acupressure may be considered an HSA-qualified medical expense, and in some cases may require an LMN. It should also be specified how and for how long acupuncture or acupressure will be used, such as with massage therapy.
Alternative treatments are not clinical trials of drugs or procedures. On the contrary, these treatments do not belong to conventional medicine. When used regularly, alternative treatments can help your mind and body relax, as if you were on a week's vacation. (Note that these alternative treatments will likely require an LMN to qualify as a qualified medical expense with your HSA.)
Common alternative treatments include:
Reiki - This is where an alternative healer accesses your body's natural energy by gently placing their hands on your body. Your hands move, circulate energy, and are believed to help relieve anxiety, relieve pain, and promote relaxation.
Naturopathy - Naturopathic doctors use a variety of treatments, such as herbal remedies, acupuncture, and other non-invasive treatments to help the body heal itself. They specialize in preventative care and nutrition which are often not covered by insurance.
Chiropractic - This is where a chiropractor returns your body to harmony by manipulating the spine. It is said to help treat a wide variety of conditions, such as headaches and chronic pain.
Energy Therapy - Similar to Reiki, except that practitioners use magnets to manipulate the energy fields in their body.
This blog is intended to be informative and should not be considered tax or investment advice. We encourage our readers to contact a licensed professional with any tax or investment related questions.