The IRS has continued its busy few weeks of new notices and updates with the release of HSA contribution limits for 2021. With total HSA accounts now exceeding 28 million with more than $66 billion in assets (Devenir), the annual contribution limit announcement is one of the most highly-anticipated in the benefits world and one that could directly affect how account holders fund their accounts in the near future.
And this year, good news again! HSA contribution limits will increase for 2021, by $50 for self-only High Deductible Health Plan (HDHP) enrollment to $3,600 and by $100 for family HDHP enrollment to $7,200. The IRS released the limits for HSAs via Revenue Procedure 2020-32 as follows:
Self-Only Enrollment in a HDHP 2021 HSA Limits:
- Maximum annual contribution: $3,600 ($3,550 in 2020)
- Minimum deductible for the HDHP to be HSA-qualified: $1,400 (no change from 2020)
- Maximum HDHP out-of-pocket limit: $7,000 ($6,900 in 2020)
Family Enrollment in a HDHP 2021 HSA Limits:
- Maximum annual contribution: $7,200 ($7,100 in 2020)
- Minimum deductible for the HDHP to be HSA-qualified: $2,800 (no change from 2020)
- Maximum HDHP out-of-pocket: $14,000 ($13,800 in 2020)
Finally, a very important piece of info to keep in mind, especially for HSA users nearing retirement: catch-up contributions! HSA account holders age 55+ can contribute an additional $1,000 on top of the maximum as a catch-up contribution to bolster their savings as they approach retirement age.
This is great news for HSA users and one that will help them save even more on expected medical expenses in the near future.Thanks for visiting the HSAstore.com Learning Center. For the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.
As the U.S. makes preparations to ride out the COVID-19 wave, millions of Americans with health savings accounts (HSAs) are turning to their employee benefits to help them cover the cost of qualified medical products for virus preparedness.
Our customer service team has received an overwhelming response from concerned customers, and we wanted to get on top of the biggest questions quickly so you can get the best info to prepare for COVID-19.
Are masks HSA-eligible?
Surgical masks and those designed to prevent the spread of pathogens like the N95 mask, are currently not HSA-eligible. However, there may be some cases when a benefits administrator may approve a mask as a "preventive health" expense, but these cases are rare.
The CDC has advised consumers that masks should only be used by those who have already contracted the virus, and due to a shortage of available masks, the CDC urges the public to not hoard masks and other equipment that could be best used by trained healthcare personnel.
Are surgical gloves HSA-eligible?
Surgical gloves are also not HSA-eligible, although without any clear guidance from the IRS, these too could be considered an eligible expense by some administrators. In most cases, it's best to check with your administrator first to check their eligibility status under your plan.
Is hand sanitizer HSA-eligible?
Hand sanitizer may be HSA-eligible, but it likely falls under a class of products that require a prescription to purchase with HSA funds. In accordance with regulations put forth in the Affordable Care Act (ACA), over-the-counter products that contain "medicated ingredients" require an Rx to purchase. The most common active ingredient in hand sanitizer is alcohol, and products must contain at least 60 percent alcohol to be considered antibacterial.
Other products such as rubbing alcohol and hydrogen peroxide may also be HSA-eligible, but could also require a prescription to be reimbursed through an HSA. To find out more about eligibility for these products, contact your HSA administrator.
Update (4.7.20): With the passage of the CARES Act, the prescription requirement for OTC medicines with an FSA/HSA has been lifted. However, hand sanitizer has not been made eligible at this time. We are appealing to the IRS for additional guidance in the hopes that this essential product be made available to tax-free healthcare consumers.
Are antibacterial products HSA-eligible?
Currently no. These are not considered qualified medical expenses but we are hopeful that they may be in the future. As always, we'll keep you posted if anything changes.
What are the best options to combat COVID-19 with my HSA?
In truth, the vast majority of preparations that the CDC recommends to combat the spread of COVID-19, such as washing hands, avoiding large crowds and wiping down commonly used surfaces with antibacterial products, are not practices that can be aided by your HSA at this juncture. The fact is, HSA regulations need to expand to allow for preventive products like hand sanitizer, antibacterial products and more to help combat this public health crisis.
HSAstore.com is taking direct steps to help HSA users:
We have recently launched our new Virus Preparedness category to ensure families can find the most popular HSA-eligible items purchased during flu season. In response to the growing pressure of the broader market, we have taken further steps as advocates of our tax-free health community to make virus preparedness our top priority.
- We will donate a portion of the proceeds from the sale of each product found on the Virus Preparedness page to the CDC Foundation to support their response in combating COVID-19.
- Our Fair Price Pledge: During the public health emergency in the US caused by the 2019 coronavirus, we pledge to provide fair price protections for all items in our Virus Preparedness category. We will make every effort to keep a steady supply of these items available to our customers at current prices. Prices may increase, however, if market conditions require it, such as paying a premium to secure product during a supply shortage, expediting product shipments to our warehouses so you can receive them quicker or other similar situations.
- With millions of Americans struggling with the unexpected financial burden brought on by the coronavirus outbreak, FSAstore.com is looking to the IRS to clarify the eligibility status of key items like hand sanitizer, antibacterial wipes and more. It's our hope that the IRS will provide guidance so that FSA users will be able to confidently use their tax-free funds to cover these much-needed items.
With coronavirus cases surging around the globe and the United States beginning to see its first cases, this public health crisis has everyone taking a closer look at their state of health, hygiene and preparedness for a potential pandemic.
Here at HSAstore.com, we've already seen an uptick in interest in cold & flu products and other assorted wellness items. The fact is, your health savings account (HSA) could be a great help in a time like this, and we want to give you all the tools and know-how you need to take full advantage of your tax-free healthcare benefits to safeguard your family's health.
What is Coronavirus (COVID-19)?
Coronaviruses are a classification of respiratory viruses that were discovered in the 1960s and include conditions ranging from the common cold to more serious conditions like severe acute respiratory syndrome (SARS) and Middle East Respiratory Syndrome (MERS). The current strain that is causing issues all over the globe, COVID-19, is similar to the aforementioned strains but has unique qualities that are making it a uniquely difficult disease to prepare for, and we're still learning more and more about the virus each day (APIC).
How do I protect myself from catching coronavirus (COVID-19)?
It's still flu season in much of the United States, and many of the same steps that we all take to avoid catching the flu can apply to coronavirus preparation - just a bit more top of mind and built into your daily routine. Here are a few ways to get started:
- Wash your hands! The risk of any virus can be reduced (sometimes by as much as 50%) by proper hand hygiene. Be sure to wash your hands with soap and water for at least 20 seconds
- Can't wash your hands? Use a hand sanitizer. While not as effective as hand washing, in a pinch, a vigorous hand rub with sanitizer is better than nothing. APIC recommends an alcohol-based hand sanitizer with at least 60 percent alcohol.
- Keep surfaces clean. Antibacterial wipes and sprays are a good start to keep your home's surfaces germ-free, and it may be smart to keep some in your backpack or purse when you're heading out. If you're looking for a DIY solution, a 1:10 bleach solution works in a pinch. Very Well Health has a quick guide to help you make one at home.
- Keep commonly used devices clean. How often are you washing your phone or keys? Use the aforementioned antibacterial wipes or a bottle of alcohol and cotton balls to do the trick.
- Keep tissues on hand. When you feel that sneeze coming on, direct it into a tissue or your arm to help prevent community spread. And be sure to dispose of those used tissues and wash your hands afterward at the first opportunity.
- Stay home if you're not feeling well. Don't risk it! Spend some quality time with your Netflix subscription and stay home and rest. If you feel sick with fever, cough, or difficulty breathing, and have been in close contact with a person known to have COVID-19, or if you live in or have recently traveled from an area with ongoing spread of COVID-19, the CDC suggests calling your healthcare professional.
How does coronavirus spread?
COVID-19 is spread person to person and through contact with infected surfaces and objects. However, the CDC warns that while it may be possible that a person can get COVID-19 by touching a surface or object that has the virus on it and then touching their own mouth, nose, or possibly their eyes, this is not thought to be the main way the virus spreads (CDC).
Are virus preparedness products HSA-eligible?
Now that you have the facts, it's time to prepare! As an HSA user, you may be wary about taking the money you've been saving to cover healthcare expenses in retirement, but if there was ever a time to break into those tax-free funds to cover health necessities, now is definitely the time!
HSAs are designed to help individuals and families cover the cost of qualified medical expenses, and there are a number of products available that can help you or your family prepare for the worst. Many of the same items that can help ward off and treat seasonal flu viruses can be very handy in this situation.
What are smart HSA-eligible purchases for coronavirus preparation?
Your HSA can play an important role in your virus preparation plan to help boost your current state of health and treat symptoms if they arise. Here are few suggestions to keep in mind that are great prep ideas for every cold & flu season:
Every home needs a good thermometer so you can stay on top of temperature readings for you or your loved ones and plan your treatment plan accordingly. With in-ear, forehead, infrared and more, there are plenty of options out there to suit your budget.
COVID-19 is a respiratory condition, as is seasonal influenza that can result in painful coughing, aches and pains. Vaporizers deliver targeted steam therapy to your breathing passages to clear mucus, soothe discomfort from coughing or a sore throat and clearing away environmental pollutants that may be present. If you're looking for something less time-consuming, saline sprays can work in a pinch.
Nasal irrigation with Neti pots and saline sprays are great options to have on-hand from common colds to more advanced conditions. Nasal irrigation is also extremely helpful in treating upper respiratory conditions to help clear breathing passages, remove environmental pollutants and ease inflammation.
Over-the-counter (OTC) Medications
Finally, it may be wise to pick up a few OTC medicines to err on the safe side. Pain relievers like aspirin or ibuprofen, cold & allergy medicines like decongestants and expectorants will be great to have on-hand throughout cold & flu season.
Finally, if you do become sick, there are a few items you may be happy that you picked up in advance. Dual hot and cold packs for treating pain and inflammation, first aid kits for any emergencies and saline wipes are great options to help you ride out the worst of your illness.
Update: As of March 2020 with the passage of the CARES Act, the OTC Rx requirement has been repealed and prescriptions are no longer necessary to purchase over-the-counter medicines with an FSA or HSA. Additionally, menstrual care products like tampons and pads are fully FSA-/HSA-eligible. Learn more here.
Am I ready?
HSAs are often described as a "rainy day fund" for healthcare expenses, and with COVID-19 becoming a worldwide concern, let's just say the storm you've been preparing for has arrived! Instead of paying out of pocket with money that's already been taxed, making preparations with your tax-free healthcare funds is a smart choice to prepare for the worst and save some money in the process.
We encourage our readers to visit the Centers for Disease Control & Prevention (CDC) website often for the latest updates on COVID-19 and the best actionable information you can use to safeguard your family.COVID-19 is a definite concern and it's spread will be generally disruptive, difficult and possibly dangerous for some at-risk groups. But taking real steps to mitigate the effects it will have on you or your family isn't an overreaction — it's a responsible choice that your HSA can help you achieve.
Sean and Brad ring in the new year by discussing the best ways users can make the most of their tax-free accounts and budget appropriately throughout their plan years.
If you want more ideas, head over to our shop, to find 4,000+ guaranteed-eligible health care items, with something for any budget.
Your health savings account (HSA) is a tax-free safe space, where you can secure funds without fear of heavy tax hits when it's time to use the money for qualified medical expenses.
(After all, there's a good chance you're going to need $250,000 or higher at retirement, just for medical costs. Yikes.)
And if you're healthy, your HSA is an even better resource, letting you save contributions from your employer without having to claim them as taxable income. And any contributions you make on your own? Tax-deductible. Money that grows with you, without much (if any) tax season confusion? Sign us up.
A quick refresher on HSA basics...
In case you're new to all this, an HSA allows users to pay for current health care expenses and save for those in the future. Its first advantage is that contributions are tax-deductible, or if they're made through a payroll deduction, they're pre-tax. Second, the interest earned is tax-free. Third, account owners may make tax-free withdrawals for qualified medical expenses. That's a TRIPLE benefit (we should totally get a stamp or something).
HSAs are available with most high-deductible health plans (HDHPs). The primary objective of a health savings account is to give individuals an additional source to fund health costs that cannot be covered due to limitations imposed by their plan.
These accounts are usually compared to flexible spending accounts (FSAs). But, there are big (huge!) differences between these types of plans. One of the unique things about HSAs that's not incorporated into FSAs is the ability to roll over unused funds on a yearly basis. Bye, deadlines!
While money contributed to an FSA can no longer be accessed after the end of a plan year (or the end of a grace period or runout period, if your plan has one), money in an HSA will stay with you until you're ready to spend. In other words, your HSA can protect you -- like a healthy safety net -- even if your health care options aren't the best.
Using HSA funds the right way
In a perfect world, you'll stay 100%, completely healthy, and can save your HSA funds to add a huge boost to your retirement savings. Or you can talk with a financial professional and maybe push that money even further by investing it the right way.
But don't forget that HSA stands for HEALTH savings account -- they're designed to be there for when you might need it most. Emergencies, uninsured treatments, whatever -- your HSA is there to keep you from dipping into your own pockets for qualified health expenses.
(There's a lot of qualified expenses -- just check out this list to see what we mean.)
If you need to access your HSA funds, you can rest a little easier -- you won't be taxed on withdrawals if the funds are used to directly pay for medical expenses that aren't covered by your HDHP. For example, non-preventive care appointments, like additional eye care appointments, dermatologist screenings, dental visits and prescription meds, to name a few.
But there are some limits. If you choose to use your HSA funds to pay for non-qualified expenses (medical or otherwise), you could face some serious penalties. But we'll get to that in a different section.
Okay, let's talk tax deductions
You can claim federal tax deductions on your HSA by using IRS Form 8889 (don't worry, it's not much extra work). This quick step, along with your 1040, will let you claim deductions on out-of-pocket contributions to your HSA.
Any contributions you've made to your HSA which have been "out-of-pocket," meaning directly from you instead of your employer, are tax-deductible.
If you're not sure how to organize this, don't worry -- the IRS has Form 8889 to do just that. Using this pretty simple document, you'll:
- Report your HSA contributions (and those from your employer).
- Figure out your HSA deduction.
- Report payouts from HSAs.
- See if there's any amount that needs to be reported as income (along with additional taxes) in case something isn't eligible.
Using Form 8889, you'll have the opportunity to list separately the contributions you've made to your HSA and the contributions your employer has made. (Please note, this doesn't apply to contributions made pre-tax from your payroll throughout the year, if available through your employer to do so.)
After completing the steps you'll find your maximum deductible amount on Line 13. Once you begin completing your tax return with IRS Form 1040, you'll input the figure on Line 13 of Form 8889 into 1040 line 25. When you're done, you'll be able to successfully claim a deduction on your out-of-pocket HSA expenses.
Wait… slow down… can you tell me a little more about Form 8889?
Okay, let's get into this a little deeper, since filling out Form 8889 the right way prevents you from paying penalties and enables you to claim certain deductions.
If you hold an HSA (or are the beneficiary of a deceased account holder), you're required to attach Form 8889 to your Form 1040 when filing your personal tax return. If you don't, you probably can't deduct your HSA contributions.
Oh -- one important note: The IRS "Last Month Rule." Put simply, this means if you sign up for an HSA toward the end of the year, as long as the account is active by the first day of the last month of the tax year (let's just call it December 1 for argument's sake) you can make a full year's contributions at once.
Put even more simply -- Sign up for HSA in November, be active and eligible by December 1, and you're allowed to make HSA contributions for the whole tax year, if you want to do it.
Sure, that's a large sum of money to add, but if you're able to do it, it's a great way to maximize your benefit and savings in a minimal amount of time.
If you stop being eligible for an HSA -- like if you switched health plans and don't have an HDHP anymore -- you'll need to include the total contributions made to your account as part of your income. This additional income is subject to a 10% added tax (calculated toward the end of Form 8889).
Can you show me how to complete Form 8889?
Before we can walk you through any of this, you need to know that we're not tax professionals and this is not to be considered tax, investment or legal advice. If you have questions about filling out your taxes or proper use of your HSA, we always recommend that you speak with a qualified tax professional.
Before you file Form 8889, you need a few other documents filled out. It's kind of like playing the lower stages of a video game before you get to the final level. Only this has your real, hard-earned cash on the line so be thorough! This includes:
- IRS Form 5498—contribution activity, provided by the HSA custodian
- IRS Form 1099—distribution activity, provided by the HSA custodian
- IRS Form 8853—reports contributions and payments from Archer MSAs and payments from long-term care insurance contracts, if applicable
- W-2 Form—displays the amount of contributions made by your employer, if applicable
Once you've gathered your necessary paperwork, carefully follow the Form 8889 instructions line by line. One mistake could force you to start over if you're not careful. It really is the most punishing video game isn't it?Let's walk through the three primary parts of the form, using some guidance directly from the IRS, since it gets a little (a lot, sorry) technical.
Part I overview...
This portion of HSA Form 8889 covers contributions and deductions. Find the amount reported on Form 5498-SA and enter it in line 2; if your employer made contributions to your HSA, enter the amount reported on your W-2 on line 9.
Be sure to make note of the contribution limits on line 3; once you hit age 55, this number will change and should be accurately reflected on your Form 8889. Line 13 is also important—it's the amount of money you can deduct from your income per HSA tax law. This number will eventually be entered on Form 1040.
Part II overview...
This section of tax Form 8889 assesses your distributions and verifies whether it was spent properly.
- Line 15 determines how much was spent on qualified medical expenses; any amount greater than box 14c will be penalized.
- If the subtraction on line 16 is a positive number, you'll owe tax and penalty on the amount (20%).
Part III overview...
Part III of HSA 8889 determines whether you owe taxes and penalties for two possible reasons:
- You utilized The Last Month Rule, then ended your HSA insurance plan early
- You funded an HSA distribution from an IRA or Roth IRA
In most cases, these lines won't have any totals. But if you do have numbers on lines 18 and 19, combine their total on line 20 (and remember to include it on line 21 "Other Income" on Form 1040.
Do the same rules apply for both federal and state taxes?
As you probably know, HSAs offer the amazing triple-tax benefit (stamp is shipping) -- contributions are tax-deductible, the HSA balance grows tax-free (at least at the federal level) and funds can be withdrawn without being taxed when used for HSA-eligible expenses.
But (and you knew there would be one) there are a few exceptions at the state level to this triple-tax advantage. California and New Jersey currently don't allow tax-free contributions at the state level. And HSA earnings -- like those that come from investments -- are taxable in California.
While many states offer triple tax benefits, ones without a state income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) don't allow for deductions for HSA contributions. Plus, in New Hampshire and Tennessee, HSA holders may have to pay taxes on any interest, dividends or capital gains earned in their accounts.
Long story short? Check with a financial advisor about any state-level rules and regulations before filing or claiming deductions. A little legwork now could save you a ton of extra work after the fact.
Making the most of your deductions
Since HSA contribution limits are in place, you may need to plan when trying to maximize your deduction. Say your employer contributes up to 90% of the maximum allowed total into your HSA, you won't be able to make any contributions on your own past the remaining 10% of the total.
To be honest, this might limit your deduction opportunities. So you should carefully scrutinize your options to determine what the perfect balance of contributions will be for your particular financial scenario.
Given the earnings potential of HSAs, you should work hard to use these accounts in the most efficient ways possible.
Now, about those HSA fees and penalties…
You might not notice small fees in your statements, but they can very quickly pile up. By the time you realize how much they're affecting your finances, the damage is already done. It's hard enough to get a handle on the fees associated with your bank and investment accounts, but it's twice as difficult with something like an HSA, which you probably use infrequently, and with a very limited understanding of the fine print.
But what happens when it's time to use this money? As healthy as you might be now, the purpose of an HSA is to serve as a financial safety net against unexpected emergencies, or larger medical costs you might face in the future.
HSA contributions aren't taxable, but if you withdraw the money for a non-qualified medical expense, you'll end up paying a 20% penalty and income tax on the distribution. If you're audited, a $500 withdrawal for a non-qualified expense would result in a $100 fee on top of whatever your tax rate is. If you're in the 15% tax bracket, you'll owe an extra $75 on top of the $100 fine.
If you're 65 and older, you can take HSA distributions for any reason and avoid the 20% penalty. The amount will still be reported as income, and the tax rate will vary based on your income.
Investment account fees
Many users choose to use their HSA as a secondary investment vehicle, but banks tend to charge a small monthly fee if you invest your HSA funds. Avoiding these fees is rare, but you can always pick an HSA provider with a lower fee, unless it's chosen for you by your employer.
If that's the case, and you want to have your HSA contributions taken pre-tax from your pay, you'll need to use whomever your employer has chosen.
On top of an automatic monthly investing fee, HSAs often charge trading fees - much like a traditional brokerage firm. Look into your trading fee options from your account administrator, so your investing dollars don't go toward unnecessary expenses.
Monthly HSA account fees
Since we're discussing it, let's not forget about the standard set of fees that come with HSAs (or any money-accruing account). HSA providers sometimes charge monthly account maintenance fees. But if you participate in an HSA through your employer, they'll often take care of these fees for you. Your enrollment paperwork should detail this, but if you're unclear, there's always the golden proverb: "check with your plan administrator."
Even if you're not participating, you can sometimes avoid the fee by keeping a minimum account balance. Of course, this varies; one well-known national bank has a $4.25 monthly service fee unless you have $5,000 or more in the account. Yet, a smaller competitor has no account fees or minimums.
Log on to your account and see if there's a monthly maintenance fee on your statement. If there is, call the bank and ask what you can do to avoid it. Some accounts start charging a fee if you switch employers and your account is no longer associated with your previous company (likely because your employer no longer pays the fee for you), so be aware of that possibility, as well.
In the end, if you have an HSA through an employer, fees are often taken care of. But if you've selected your own health savings administrator, and want to get the most out of your HSA, you need to be aware of the fees you're being charged, and how to avoid them.
This is just a guide -- always lean on a professional
We mentioned it earlier, but it goes without saying -- before you dive into your tax planning, be sure to speak with your employer, insurance provider and/or a qualified financial or tax advisor (or all of the above). Any of these professionals should be able to help you clearly understand what your needs are when it comes to documenting your contributions and making the right moves with your account.
"HSA or FSA?"
Asking this question is like asking someone, "Lollipops or lobster?" Technically, they're both similar (foods and tax-free health care accounts, to be specific). But comparing the two on an apples-to-apples level isn't going to help you make the right decision for your needs.
In reality, choosing between a health savings account (HSA) and a flexible spending account (FSA) isn't a throwaway decision. On the surface, they're both accounts you can contribute to tax-free to save for medical costs like deductibles, copayments and coinsurance, alongside monthly prescription costs and also to save on everyday health needs from pain relief to baby care to travel essentials and even hi-tech health products.
Let's first tackle the HSA.
Are you eligible for an HSA?
Contrary to popular belief, HSAs aren't available to everyone. Only people who have a qualified high-deductible health plan, or HDHP, can select an HSA. These plans have the benefit of lower monthly premiums -- a huge win if you're generally healthy -- but they require you pay more out of pocket for medical needs until you hit your deductible. Only preventive care like checkups and general wellness visits are usually covered before you hit your deductible.
So, before you even bog yourself down wondering which account is right for you, figuring out which health insurance fits your needs and budget is the real first step. In short, if you're unsure of your ability to pay out of pocket, you might want to think this through.
If an HDHP makes sense for you, though, there are still some things to consider. To qualify for an HSA:
- An HDHP has to be your only health insurance plan
- You must not be eligible for Medicare
- You cannot be claimed as a dependent on someone else's tax return.
- You have to be currently covered under a high-deductible health plan (HDHP)
- You aren't currently on Medicare or supplemental health care plan (including a spouse's employer-sponsored plan)
- You're not considered a dependent under anyone else's tax return
- You're not covered under other disqualifying health coverage, including yours or your spouse's enrollment in a traditional FSA
Also, know that almost all HDHPs are HSA-qualified, but it's always good to double check with your provider before committing during open enrollment.
(Then check again, just for kicks and giggles…)
So, what are the differences between HSAs and FSAs?
Like we implied in the beginning of this guide, people often use the terms "HSA" and "FSA" interchangeably. But other than the purpose of using tax-free funds for medical needs, the accounts are as different as night and day.
Rather than trying to explain this through really long paragraphs, let's break this down in a side-by-side comparison. There are several additional differences between these accounts, like having more flexibility in contributing, the ability to keep your unused balance and additional tax benefits make HSAs a great long-term option, if you're able to do it. But both offer immediate relief for medical expenses.
Health savings account (HSA)
Flexible spending account (FSA)
Must have a high-deductible health plan (HDHP)
No eligibility requirements beyond
2020 contribution max -- $3,550 for individuals or $7,100 for families
2020 contribution max -- $2,750
Changes to contributions
You can change how much you contribute to the account at any point during the year.
Contribution amounts can be adjusted only at open enrollment or with a qualified life event (QLE) like a change in employment or family status.
Unused funds roll over into the next year.
Funds are "use-it-or-lose-it," if not used by plan deadline, or grace period deadline, or rolled into the next year's total .
Your HSA can follow you as you change employment. Additionally, self-employed workers can have an HSA.
Your FSA is tied to your job. You may be able to continue FSA ownership through COBRA.
Contributions are tax-deductible, but can also be taken out of your pay pre-tax. Growth from interest and/or investment is tax free.
Contributions are pre-tax, and qualified expenses / reimbursements are also untaxed.
Do I need to consider an HRA?
An HRA is an account designed to pay for medical expenses you incur that your standard health insurance plan does not cover. An annual allowance on spending from the account is established by your employer, which is then used to reimburse you for eligible out-of-pocket medical expenses, after they happen.
Employers also often define what you can use your HRA on, so you may be limited to more common costs like copays and coinsurance, or you may have an HRA that's wide-open to all eligible medical expenses including over-the-counter medications (or OTCs as we call them).
How do HRAs work, exactly?
Payments made into an HRA are tax-deductible to your employer, while the reimbursements are tax-free to you. And, much like FSAs, HRAs are owned by your employer. In other words, if you take a new job somewhere else, your HRA isn't making the trip with you. And if you don't use the allotted HRA funds within the defined calendar year, they won't carry over into the following year. In fairness though, HRAs are funded solely by your employer; you're unable to contribute as with an HSA or FSA.
Company-owned HRAs are paid into solely by your employer and the rules around how and when they can be used are also defined by your employer.
With an HRA, only out-of-pocket medical expenses are eligible for reimbursement. This may include out-of-pocket expenses your health plan doesn't cover, as well as other qualified expenses that are defined by the IRS and approved by your employer.
Something listed as an IRS-approved expense won't necessarily be an employer-approved expense. So, you'll want to check with your plan administrator regarding the specifics of what your HRA actually covers.
This is a big contrast to an HSA, where, in addition to your financial contributions, your employer and family members can make contributions. HRAs are real money accounts that accumulate interest over time.
Ultimately, HRAs are accounts designed with the same general goals as FSAs and HSAs. And they can offer advantages depending on your health and financial outlook. Be sure to speak with a financial professional to see if an HRA better suits your family's needs.
Can I have both an HSA and FSA?
As nice as it would be, if you qualify for (and choose) to go the HSA route, you can't also choose to set up a traditional health care FSA. Yes, this includes household situations where your spouse might have separate health insurance, but wants to claim the same dependents. In other words, you cannot benefit as a dependent on someone else's FSA while also maintaining your own separate HSA.
The IRS won't allow for double-dipping of any kind when it comes to tax-free benefits (you can still double dip in your salsa though, so make sure you're in compliance before signing on the dotted line. (We strongly recommend not crossing the IRS on these matters.)
But there are a few exceptions to this "one or the other" rule. A traditional FSA will probably not be compatible with an HSA. And if your spouse elects an FSA that's not compatible with an HSA, your ability to contribute to an HSA goes away, too, since you're technically considered covered under that FSA (whether your spouse adds you as a dependent or not).
But there might be a few exceptions...
This type of account typically only allows you to spend money on qualified dental and vision expenses. The account can also be used for your spouse and qualifying dependents including children through age 26.
Remember to check with your plan administrator or HR department about all of the details of your plan, including which plan will automatically pay first. If the plans are set up so that your HSA funds are withdrawn first, you may want to see if it's possible to have FSA-eligible expenses withdrawn from the FSA first, or if you'll have the ability to request that they be transferred from the HSA to the FSA.
This isn't a common type of account. With a post-deductible FSA, before you hit your minimum deductible for the year, expenses are limited to dental and vision only with this account. Once you hit your minimum HSA deductible for the year, you can use the money from the post-deductible FSA for all qualified medical expenses.
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So, which tax-free health account should I get?
There is no "right" answer to this - both accounts have benefits that can make managing your out-of-pocket medical expenses easier throughout the year. But you should opt for an HSA if you qualify, if for no other reason than the limits are higher and you can carry over your contributions from year to year. If you don't qualify, sign up for an FSA.
When deciding on a tax-free health care setup, all of this back and forth needs to boil down to one question -- "What do I really want to do with this money?" While FSAs are perfect for covering the costs of everyday medical needs, or offsetting larger expenses, HSAs can do the same, while also serving as a longer-term resource of financial stability.
Contract work, freelancing, moonlighting -- whatever you call it, the way the world works is changing in a very big way. Lately, more and more people are choosing to leave traditional workplaces and pursue self-employment because of the freedom they have to choose their work environment, set their own hours, and maybe even add a little more variety to their chosen profession.
Plus, with the exponential growth of connectivity, it's easier than ever to stay connected to companies and clients remotely. This increased focus on contract work means workers have a lot of new career options, while companies can hire the right people for their needs… not just the best people within driving distance.
How does this relate to our goals for this guide? Unlike FSAs, which require employer-sponsored health plans, freelancers are eligible for HSAs. Not only can they help users pay for out-of-pocket medical expenses and everyday health products, but they also give you a distinct triple tax benefit:
- The contributions you make to your HSA are tax-free, similar to contributions to your 401(k) retirement account, traditional IRA or other interest-bearing account. The lower your adjusted gross income (AGI), the lower your taxable income.
- The interest you earn from your HSA dollars grows tax-free.
- When you make withdrawals for qualified medical expenses, those withdrawals are also tax-free.
So... what's the concern with becoming an entrepreneur?
Basically, leaving the traditional workforce for an increasingly competitive freelance arena means dealing with the lack of security and stability that comes with it. While there are plenty of health insurance options available to gig workers, the medical and retirement benefits that come with a full-time, salaried role are still more desirable.
For many people making the leap to self-employment, their health care insurance coverage may not be at the top of their pros and cons lists. But if you're an HSA owner, you can breathe a little easier on your journey into the independent workforce. If you had an HSA with a previous employer, you can make the leap to independent employment with money already saved for health care needs. It might not be ideal, but it's your money to use for medical costs -- whether it's for in-office visits, bandages or advanced hi-tech health products -- as you see fit.
HD-What? Overview of HDHPs and HSA-eligibility
While HDHPs can sound scary, they can save you money in the long run. Many younger consumers are even opting for HDHPs to lower premiums on health care.
We'll take HDHP enrollment step-by-step , from opening an HSA to budgeting for expenses, to even learning how to negotiate with medical professionals. Follow these tips and you'll be well on your way to both physical – and financial – health.
Become a savvier health care consumer
These days, consumers are looking to get the most bang for their health care buck, and are shopping around for the plan that best fits their needs.
Become a better health care consumer by taking advantage of tax-free accounts like HSAs. As always, do your homework. While an HSA is a great way to offset the cost of an HDHP, not all health plans will leave you eligible for one.
Shop around for health care. Providers, out-of-pocket costs, copays, and other related costs - these can cost you big if you haven't met your deductible yet, so you'll want to be smart with your spending. You may choose to visit a cheaper provider, then use those extra funds to pad your savings, invest the money, or even splurge on a health-focused bundle of products.
Negotiate your medical bills. Educate yourself on what specific procedures or specialist visits should cost, then call your provider and offer something in that range. Many providers are more than willing to negotiate.
Ask before you pay, since getting any funds recouped will likely be tougher than simply paying less up front. It also pays (pun intended) to know how to effectively communicate with health care professionals. In other words, be nice!
- Buy generic. From monthly medications to OTC purchases, buying generic can save you a ton of cash. And when you're footing the bill of a higher-than-normal deductible, you may not notice the difference between brand name and generic, other than the name on the box.
- Get a primary care doctor. While this may seem opposite from the advice we gave above, having a primary care doctor you know and trust is invaluable in saving money on health care. Primary care physicians are almost always cheaper than trips to urgent care centers or emergency rooms, and they're a great sounding board for all your health care questions.
Open an HSA
You know you saw this coming. Opening an HSA is one of the smartest things you can do when enrolled in an HDHP. Not only does the tax-free account help offset the cost of health care, the funds also roll over year-to-year and can be used, penalty-free, for non-medical expenses after age 65 (income taxes apply).
Plan ahead to put some dollars aside for out-of-pocket medical expenses so that you're prepared for any unforeseen major medical events. If you have cheaper health care costs that year? No worries. Your money carries over year to year. And it comes with you when you change jobs.
Also, don't overspend! Make an annual budget for your HSA so you don't end up short at the end of the year.
Keep an eye on your deductible
While trying to cut corners on care may be tempting, this may work against you if enrolled in an HDHP. After all, once you hit your deductible, you're 100% covered for the rest of the year.
So watch your deductible and time it correctly. Keep in mind that HDHPs require a minimum deductible of $1,400 for an individual and $2,800 for a family, with an out-of-pocket maximum limit of $6,900 and $13,800 in 2020.
With an HDHP, it's all about balance. Before enrolling in an HDHP, it's wise to consider how large of a deductible you can afford. While this cost might sting at first, if you can hit it in the first half of the year, you're better off, since you'll be covered the remainder of the year. But if it won't be until mid-December to meet your deductible, you'll be scrambling to get all those last-minute dentist, optometrist, and yearly physicals in afterward.
If you've been contributing regularly to your HSA with the funds you've saved with a lower monthly premium (an attractive part of most HDHPs) however, you should have a nice little health care rainy day fund.
Consider add-on benefits
You may consider add-on benefits to supplement your HDHP. These are basically "add-on" health care perks, also called voluntary benefits, that you pay for yourself and can use to help round out your health care coverage.
Examples include vision and dental coverage not provided by your employer or a supplementary life insurance policy.
- Dependent Care FSA - a tax-advantaged account used to pay for the care of any dependents, such as day camp/daycare for children or daycare for dependent adults.
- Limited Purpose FSA - These regularly go hand-in-hand with HSAs and this specialized FSA covers things like dental and vision or coverage for dental and vision over-the-counter products.
Anticipate your health needs
If you're single and healthy, the money saved each month in an HDHP can go toward living costs and savings goals. While you can't really predict if and when you'll get sick, you can figure out what routine or preventive care you'll need like annual check-ups every spring, and lab work to make sure things are going well.
If you require more frequent doctors' visits or prescription and OTC medications, you'll want to budget accordingly.
Pro Tip: If you have prescription medications, see if you can order them in bulk. It could net you a discount.
Because funds in your HSA roll over (you don't need to spend all the funds in your account by the end of the year, like with an FSA), you don't have to feel rushed to get your balance to zero by a deadline.
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Use it as a financial cushion
Freelancers tend to be used to feast or famine with how much money they're bringing in. During the less-productive times, tap into your HSA to pay for out-of-pocket medical expenses. You can also use it to purchase qualifying health items that you might use on a regular basis. What you can purchase with funds from your HSA could surprise you.
Sync up spending with the ebb and flow of freelance work
If you're having a slow month, you can tap into your HSA funds to pay for eligible expenses. As an example, if you live in Florida, you might need sunscreen year-round, which is eligible, as long as it's SPF 15+ and broad spectrum. Plus, you can purchase pain relief products (when prescribed), eye care and lens wipes, and even advanced diagnostic products -- they're also typically eligible expenses.
But, if you're having an awesome month income-wise, consider putting a bit extra into your HSA. That way you'll have it tucked away during the slower periods.
For those participating in their HSA-qualified health plans as individuals, the contribution limits for 2020 will be $3,550 a year, and $7,100 for those participating as a family. If you're age 55 or older, you can add an extra $1,000 to those limits as a "catch-up" contribution.
Contributing to an HSA as a sole proprietor
Since you file taxes on your personal tax return, you're essentially treated like someone making HSA contributions on their own. While you are not able to contribute to an HSA pre-tax throughout the year, you are able to deduct some of your contributions on your personal income tax return.
The good news is, as long as you made a profit during the tax year (go you!), you can file the deduction. The tradeoff is that you can't put more in your HSA than your net self-employment income.
Unlike traditional employees that contribute to their HSA with pre-tax income dollars, you would contribute after-tax dollars to your HSA and then do a line item deduction in your Schedule C. To make sure you're getting everything right, it's best to consult a tax professional on these matters.
If you have an LLC...
As a single member LLC, you're not going to treat your HSA much differently than a sole proprietor. Though, if you have employees, you may be able to implement a plan that can allow those employees to make pre-tax contributions. This is what's known as a "cafeteria" or "Section 125" plan.
The downside is that, as the owner, you can't participate. You can only contribute after tax dollars and it's counted towards your personal taxes. So, whatever you contribute towards your HSA will reduce your adjusted gross income. Just like a sole proprietor, you can only claim this deduction if you actually made a profit.
Freelancers often work to reduce their taxable income by as much as possible each year through deductions, expenses and even end-of-year capital expenditures. An HSA can become part of a strategy to reduce taxable income while saving money for health expenses that can be used tax-free at any time.
For all other expenses, we encourage patience. Before age 65, tapping into an HSA for non-qualified withdrawals comes with a steep 20% penalty, plus that money becomes taxable. So you might want to hold off on that vacation. But once you turn 65, this money can be withdrawn penalty-free for any reason (income taxes apply).
Being 65 might seem far in the future for many freelancers, but putting money into an HSA that doesn't get spent on medical expenses eventually turns into a tax-free retirement savings account.
We understand that leaving the traditional workforce for contract work can be daunting. Gig workers can face the challenge of keeping up with multiple clients, tracking payments, and dealing with a more haphazard work schedule than even those who own small businesses.
But with an HSA as part of your health care and savings plan, your physical and financial well-being doesn't have to add to the stress.
Here's a question: Would you invest in a classic car and restore it just to drop the kids off at school? Probably not. With the money and time you put in, you're going to want to really take advantage of everything said car has to offer. Whether that's the joy of slowly fixing it up into a future road warrior to seeing exactly how fast that baby can go down a track.
An HSA is kind of like that classic car.
HSAs are great because they can be invested like standard retirement accounts, to grow your savings over time. The more love you put in, the better it gets for the future. And with the health care costs rising well ahead of the pace, every investment advantage can help – especially one with a killer tax advantage.
So, why do so many HSA owners choose to limit themselves and the potential their money could offer by not maximizing these savings through sound investment strategies?
Let's take a quick look at how your health savings account can become a nest egg like no other.
The 101-level stuff...
Contributions are made tax-free, up to the annual limit, and funds can be used tax-free for qualified medical expenses. For 2020, you can contribute $3,550 for individual participation, and $7,100 for two-person or family. Plus, if you're 55 or older, you can make additional "catch-up" contributions up to $1,000 each year to help boost your savings.
Even better? if you have an HSA, you get a triple tax benefit.
- You get interest earned on the money you contribute
- You have no tax on those contributions
- You can pay for qualifying health expenses, tax-free
After you turn 65, this money can be used for anything you want though it'll still be taxed at the normal income tax rate. And no matter where you work or hold your account, the money goes with you, every step of the way. It's yours to use.
Bottom line? Even if you don't invest, there's money to be made, just by making sure you max out your contributions. But if you do… well, we'll get to that in a bit.
Benefits of investing HSA funds
This is why you're here, right? Because HSA funds have been earmarked for healthcare use, people often forget that investing can be a straightforward way to turn solid HSA balances into something really substantial for retirement.
And, if you have no plans to use this money for a while, investing might be the best way for you to maximize this account.
If you've already invested money before, your HSA investment strategy should be the same (or at least similar) to any of your other retirement accounts. Meaning, any HSA investments should support your larger portfolio diversification plan, while also staying within the level of risk you're most comfortable with.
And if you haven't invested before, no worries -- it's the same strategy: Starting out strong while you're young and healthy, then investing more conservatively over time.
The reason is pretty simple -- if you're younger and healthier, and less likely to need funds for health care needs, you probably have more freedom to be a little assertive with your investment strategy, to try and make some early gains.
As you grow older, and more health care needs begin to pop up, it might make more sense to slow things down, making more measured investment maneuvers, and allocating more money for health essentials, for those inevitable "just in case" moments.
If you have an HSA through your employer, you might have some easy investment options at your disposal. But whenever possible, you should find investments that best match your existing strategy.
More importantly, we need to revisit the idea of risk, and how comfortable you are investing your money this way. While it's great that HSAs are flexible enough to allow for exponential growth, you still need to be careful.
A cautious example
Let's say you decide to take a large chunk of your health savings and invest it in a mutual fund – which has a range of stocks, bonds and other investment opportunities. They offer a great chance to grow, but can also be really volatile, and often lose value.
If you're young, healthy and wealthy, this may not be a huge problem. But if you suddenly need these funds for emergency medical expenses, it might be rough to think of money you lost, when it's more money you need.
As always, this should not be considered legal or tax advice in any way. Always speak with a trained financial professional before making any investment.
Basic HSA investment options
Your bank or credit union might offer an investment option, but you may find that a different financial institution might have better offerings. There are a lot of HSA administrators that allow you to invest the money in your HSA, each with its own set of fees and options.
Most larger institutions give you the option to invest in stocks, bonds, mutual funds or other common investment possibilities. But the IRS is pretty flexible when it comes to investment rules, so don't be surprised if your administrator also lets HSA funds be used for real estate, mortgages, exchange-traded funds, and even business investments.
There are a huge range of options, which your HSA administrator can explain in detail. But the IRS is pretty open minded, as long as you're not trying to use health savings funds to invest in art, collectibles, jewelry, vintage cars or other tangible items, per the tax code.
(Apologies to the dedicated stamp collectors out there -- you'll have to use other funds for those rarities.)
Some valuable HSA investment resources
As always, we recommend speaking with a licensed financial advisor before making any investment decisions with your HSA. But to give you a head start on that discussion (and a better picture of what your investment potential could look like) check out some of these tools from our trusted partners.
- Discovery Health HSA vs traditional health plan calculator - A side-by-side comparison calculator for HDHPs (with HSAs) to traditional health plans.
- HSA Plan comparison calculator - Another valuable comparison tool that also allows you to compare different HSA options.
- PNC HSA investment options - A good cross-section of the types of investment options that might be available to you as an HSA holder.
- Self-directed investment options - HSA Bank's overview of self-directed investment choices.
- HSA contributions limit exercise - A tool to calculate the maximum HSA contribution you may make based upon your HDHP coverage type, and how much of the year you are/will be covered by an HDHP.
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It's pretty obvious that there are some risks involved with any investment, but there's no denying the benefits that can come from making a few shrewd moves with your tax-free funds. And making these moves when you're young and healthy can help you stay young and healthy if your medical needs grow as you get older.
Just like buying and building up a car is overkill for soccer practice runs, not taking full advantage of your HSA's possibilities can limit the benefits of your savings. Talk with your HSA administrator to see what investment options make the most sense for your future.
We're finally back - and with a new co-host! Sean and his new partner Brad tackle what to look out for this open enrollment season and what all FSA/HSA users should know before they contribute this season! We also have a sit down with personal finance writer Zina Kumok, who provides firsthand tips for HSA users.
Also, we add a roundup of our favorite product picks and the usual banter you've come to expect from Podcast Eligible.
This episode's product picks
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It's summer! Naturally instead of taking vacations, we worked even more! We took a recent poll and asked our shoppers about their sunscreen preferences and here are the results. Oh, and Kevin's back (kind of).
Also, don't forget our Sun Care Center, which gives you a complete overview of how to tackle the season's biggest sun care questions. And as always, for all things flex spending, be sure to check out the rest of our Learning Center, and follow us on Facebook, Instagram and Twitter.