Tax Facts: The deductibility of HSA contributions

If you have HSA-qualified health insurance, you probably already know that you can deposit tax-free money into a health savings account (HSA) to save for future medical expenses or even for retirement. But "tax-free" can mean different things depending on how you make your HSA contributions.

You can contribute to an HSA as long as you have coverage under an HSA-qualified high-deductible health plan (HDHP). And, you can't also have another disqualifying health plan, such as most FSAs and other full-coverage health insurance plans.

Some people make their own contributions directly to an HSA, while others make their contributions via their employers. The employer then uses a salary reduction arrangement to take out pre-tax money from the employee's pay and send it to the HSA on the employee's behalf.

In both cases, there's no federal income tax on the HSA contributions (and in most states, there's no state income tax, either). But some HSA contributions are still subject to payroll taxes. Let's take a look at how it works.

Income tax vs. payroll tax

First, let's get to a very common question: What's the difference between income tax and payroll tax?

Income tax is paid entirely by the employee, and is usually designated on your W-2 as "withholding" or simply "federal tax." And in most states, there's an additional line for state withholding/tax.

Payroll taxes, which fund Social Security, Medicare, and unemployment insurance, are paid partly by the employee and partly by the employer.

If you're self-employed, your self-employment tax refers to Social Security and Medicare taxes, and you essentially pay both the employer and employee portions, in addition to income tax.

Contributions via salary reduction: Avoid both income tax and payroll tax

If you've signed up for an HDHP and HSA through your employer, your employer is likely using a Section 125 plan so you can make salary reductions to cover your HSA contributions before your tax liability is calculated (meaning you end up paying income taxes and payroll taxes on a smaller amount of income).

Some employers also make contributions on their employees' behalf, since HSA contributions can come from the employer and/or the employee (the total amount contributed, including the portion contributed by the employer, can't exceed the annual contribution limits).

In 2019, that's $3,500 if you have HDHP coverage for just yourself, and $7,000 if you have HDHP coverage for yourself and at least one other family member.

Employer contributions to an HSA are not considered income and so they're not subject to income tax or payroll tax. If the employee makes contributions via a Section 125 salary reduction arrangement, those contributions are also considered employer contributions, which means they're not subject to income tax or payroll tax (see the instructions for IRS Form 8889; these contributions show up in Box 12, with Code W).

If your employer is deducting your HSA contributions from your paycheck but does not have a Section 125 plan allowing the contributions to be calculated before taxes, your HSA contributions would be considered income (this is rare, but it can happen).

You can then deduct that amount on your tax return to reduce your income tax, but you would not be able to avoid payroll taxes on the contributions.

Contributions made outside your payroll system: Avoid income tax, but not payroll tax

But what if you buy your HDHP coverage on your own? Or choose to use a bank or brokerage account other than the one your employer uses as an HSA custodian? You can send money to your HSA yourself, rather than using your employer's salary reduction plan (and this is your only option if your employer doesn't offer a means of contributing to an HSA via the payroll system).

You won't have to pay income tax on that money, but you'll still pay Medicare and Social Security taxes on it, and in most cases, unemployment insurance tax.

When you make your own HSA contributions (as opposed to using your employer's salary reduction arrangement) you make the contributions during the year with after-tax money, and then you get to deduct your contributions on your tax return (line 25 on Form 1040), regardless of whether you itemize deductions or take the standard deduction. But that just eliminates the income tax — there's no mechanism for recouping the payroll taxes you paid on that money.

Keep in mind that although avoiding payroll taxes sounds like a win, the current benefit may be partly or entirely offset by smaller Social Security checks once you retire, since the amount you get in Social Security benefits is based on the amount you earned that was subject to Social Security taxes during your working years.

As always, we're here to help you learn the basics but can't offer tax or legal advice. Always speak with a tax adviser if you're curious about how this works for your situation.


Tax Facts is a weekly column offering straight up, no-nonsense HSA tax tips, written in everyday language. Look for it every Tuesday, exclusively on the Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.


Wage Up! HDHPs and male contraceptive coverage

Health insurance is regulated at both the state and federal level, but HSA rules are federal. Let's take a look at how that plays out when it comes to pre-deductible coverage for male contraception.

HHS regulations from the Affordable Care Act require all non-grandfathered health plans to cover a variety of preventive care at no cost, regardless of whether the deductible has been met. The covered preventive care includes:

And in 2013, the IRS clarified that all preventive care mandated under ACA regulations would be considered preventive care under HDHP rules. That allowed HDHPs to be compliant with the ACA — they cover the required preventive care at no cost to the patient, and also meet the guidelines for HSA-qualified plans.

What if states require additional coverage?

States can impose additional insurance regulations that go beyond the ACA's requirements. Though states can't change the rules that apply to HSA-qualified HDHPs since that's managed by the IRS.

Some states have taken action to address an issue that many consider unfair. Under HHS regulations, all types of FDA-approved contraceptives for women have be covered at no cost to the plan enrollee. But FDA-approved contraceptives for men don't have to be covered.

Vermont, Illinois, Maryland, and Oregon have passed laws requiring all state-regulated health plans to cover FDA-approved male contraception (condoms and vasectomies), regardless of whether the deductible has been met. This could result in significant cost-savings, since vasectomies are much less expensive than tubal ligations, which are required to be covered under federal regulations.

But while these state rules were created with good intentions, they put people with HDHP coverage at risk of losing their ability to contribute to their HSAs. That's because the addition of pre-deductible coverage for male contraception makes the plans incompatible with the rules for HSA compliance.

[Note that if the federal government were to mandate no-cost male contraceptive coverage, the plans would still be considered HSA-compliant.]

To address this, the IRS issued transitional relief in the spring of 2018. The IRS has clarified a few points:

  • Prior to 2020, they'll let people contribute to an HSA if they have a plan that would otherwise be an HDHP, but that covers male contraception as a result of a state mandate.
  • The IRS does not currently consider male contraception to be a preventive care benefit, so in 2020 and beyond, people whose plans cover male contraception pre-deductible would not be eligible to make HSA contributions.
  • But the IRS is considering changing the rules to allow pre-deductible coverage of male contraception on HDHPs (you can submit a comment to the IRS about this by adding "Notice 2018-12" in the subject line).

More states might opt to take action on this issue, adding male contraceptive rules. But for the time being, they'll likely exempt HDHPs from the new rules so that people in those states can continue to contribute to HSAs in 2020 and beyond. Maryland has already enacted additional legislation to exempt HDHPs from the new state law mandating no-cost coverage for male contraception.

It's also possible that the IRS could relax their stance on the issue of male contraception and HDHPs. Stay tuned!


Whether you're spending steadily or saving for something big, Wage Up! is where we highlight the latest services available to buy with your HSA, every Monday on the HSA Learning Center. And for everything else about your health and financial wellness, be sure to follow us on Facebook and Twitter.


Compound It! The affordable premium perk of HSAs

Does the term "high deductible" scare you? If so, you're not alone. Particularly if you're used to having coverage with a low deductible and copays for things like office visits and prescriptions, the idea of switching to a high deductible health plan (HDHP) might make you understandably anxious.

But having an HDHP lets you save tax-free money in a health savings account to cover future medical bills, and the HDHP itself is a good choice if you want to save money on your monthly health insurance premiums--the amount you pay to be covered by your plan each month.

When you get employer-sponsored coverage

According to the Kaiser Family Foundation, the average single employee who selected a non-HDHP HMO plan in 2017 had to pay about $128/month in premiums via payroll deductions (the employer paid an average of $460/month in additional premiums; most employers pay the majority of their employees' premiums).

But for single employees who selected HDHP coverage, the average employee's premium was about $85/month — a savings of approximately $43 every month.

In both cases, the employees have to pay a lot more if they want to add family members to their plans. But the employee's share of the premiums for family coverage is still cheaper under an HDHP than under the average HMO option. An HDHP averages $383 per month, versus $571 per month under an HMO.

When you buy your own health coverage

If you're buying coverage in the individual market (ie, you don't get it through your employer), you'll likely have numerous options. Nearly every area of the country has at least one HDHP available to people who purchase their own coverage, but there will also be an assortment of other options available.

In the individual market, the HDHP options will be among the lowest-priced options, although there may be some slightly lower-priced non-HDHPs available. Keep in mind, you can't contribute tax-free money to an HSA if you pick a non-HDHP.

This is important for people who might otherwise simply select the lowest-priced plan — don't forget about eligibility to contribute to an HSA when you're picking!

A 40-year-old in Denver who buys her own health insurance in 2018 and doesn't qualify for any premium subsidies would pay $353/month for an HSA-qualified plan with a $5,550 deductible. This is in contrast to $472/month for a plan with a $5,300 deductible, but with copays for things like prescription drugs and primary care visits. Note that both plans are HMOs, but they're offered by two different insurers, along with numerous other plan designs.

Prices and plan options vary considerably from one area to another, but in general, HDHPs will be among the lowest-cost plans.

Lower premiums save you money all year long

In some cases, the more expensive option will be the better choice though you can't make that decision until you look objectively at the numbers. Here are some points to keep in mind:

How much will you save in premiums by picking the HSA-qualified HDHP, versus a plan that isn't HSA-qualified?

In the example above, using national averages, a single employee would save $43/month in premiums by selecting an HDHP instead of a non-HDHP HMO. An employee who needs family coverage would save $188/month. The 40-year-old in Denver who picks the HDHP (as opposed to the copay plan described above) not only becomes eligible to save tax-free money with an HSA, she also saves $119/month in premiums.

How often do you typically use the sort of medical services that would be covered with a copay on the non-HDHP options available to you?

If you only go to the doctor twice a year, is having copays worth the extra money you'll pay in premiums every month? (keep in mind that in almost all cases preventive care is covered in full, before the deductible, regardless of whether you choose an HDHP or a non-HDHP).

Do you think you'll reach the out-of-pocket maximum by the end of the year?

If you're anticipating significant medical costs, you might end up hitting the maximum out-of-pocket no matter which plan you choose. You may find that the various plans available to you have similar out-of-pocket maximums. So even though HDHPs are often touted as being a better option for young, healthy people, they can be a good option for people with significant medical needs, too.


Compound It! is your weekly update of achievable, effective, no-nonsense HSA saving and investment advice, delivered by people who make it work in their own lives. For the latest info about your health and financial wellness, be sure to check out the HSA Learning Center, and follow us on Facebook and Twitter.

Tax Facts: Your 2019 mid-year HSA check-in

It's the middle of 2019, believe it or not, which means it's time to check in on your HSA goals, progress, and future planning.

Are you hitting your contribution goals?

If you have coverage for just yourself under an HSA-qualified high deductible health plan (HDHP), you can contribute up to $3,500 to your HSA in 2019, including contributions that an employer or anyone else makes on your behalf. If your HDHP also covers at least one other family member, you can contribute up to $7,000.

Your ability to contribute to your HSA obviously depends on your financial situation, but contributing as much as you can, up to the maximum allowed, is usually a good idea:

  • HSA contributions are pre-tax (either via a pre-tax payroll deduction or deducted on your income tax return)
  • Any growth in the account (interest or investment growth) is tax-free.
  • Withdrawals are tax-free as long as you use the money for qualified medical expenses. This includes your deductible and out-of-pocket costs under your HDHP, but also things that aren't covered by your HDHP such as dental and vision care, HSA-qualified products, long-term care, etc. And even if you later switch to a non-HDHP health plan, you can continue to use the remaining funds in your HSA, tax-free, to cover your out-of-pocket medical expenses.

Unlike FSA contributions, your HSA contribution amounts are not set in stone for the year. You can stop, start, or change them at any point. You can opt to send one lump sum to your HSA, or spread out your contributions throughout the year. So if you haven't been contributing as much as you wanted to, you have the option to bump up your contributions at this point.

You're responsible for making sure that you don't exceed the allowable contribution limit, so if you're automatically contributing a certain amount of money to your HSA via payroll deduction or periodic bank drafts, now's a good time to double check to make sure that your current track isn't going to result in excess contributions by the time the year ends.

Are your withdrawals aligned with your long-term financial goals?

If you're like most people with HSAs, the majority of your contributions end up getting withdrawn each year to pay for medical expenses. There's nothing wrong with this approach to managing your HSA — it's allowing you to use pre-tax money to pay your medical bills, which is certainly better than having to pay them with money that's already been taxed.

But sometimes people simply aren't aware of the other options available to them. This includes the fact that HSA funds can be invested in the stock market as part of your long-term financial plan, as well as the fact that you can cash-flow your current medical expenses — while letting your HSA funds grow long-term — and reimburse yourself from your HSA years or decades in the future (make sure you're saving all of your receipts and keeping careful track of your medical expenses!).

Your mid-year HSA check-in is a good time to familiarize yourself with the flexibility that HSAs offer. Depending on your circumstances, you might decide to bump up your HSA contributions for the rest of the year, and/or opt to let your HSA money continue to grow for now, with a plan to reimburse yourself sometime in the future.

There's no right or wrong answer here, since it depends so much on your unique situation. But the more you understand about HSAs, the better you'll be able to utilize yours.

Are you keeping careful records?

Regardless of whether you're using your HSA to pay medical expenses as they arise or waiting to pay yourself back at some point in the future, the onus is on you to keep track of all your medical expenses. If the IRS ever questions your HSA withdrawals, you'll need to be able to show them receipts.

And, as is the case with any financial data, this process will be much easier if you're systematic and organized with it. In other words, don't just haphazardly stash receipts in a dusty shoebox under your bed!

Future planning

Even though it's only the middle of 2019, employers and insurance regulators are well into their planning for 2020 and beyond. Here are a few points to keep in mind as you plan for the future:

  • If your HSA is established through your job, is your employer contributing any money to your account? This could be a potential point for negotiating your compensation.
  • Keep an eye out for future federal regulations that could expand access to HSAs. President Trump signed an executive order in June 2018 that directs the Department of the Treasury to "issue guidance to expand the ability of patients to select high-deductible health plans that can be used alongside a health savings account, and that cover low-cost preventive care, before the deductible, for medical care that helps maintain health status for individuals with chronic conditions." (this could potentially open the door for an expansion of what preventive care can be provided pre-deductible on an HDHP).

    The executive order also directs the Department of the Treasury to propose regulations that would update Title 26, Section 213(d) — which outlines what counts as a qualified medical expense — to include expenses for things like direct primary care arrangements and health care sharing ministry plans. Depending on how this is done, it could have significant changes for HSA utilization.
  • If you're already starting to plan for next year, keep in mind that the contribution limits for HSAs will increase again. In 2020, you'll be able to contribute $3,550 to your HSA if you have self-only HDHP coverage, and up to $7,100 if your HDHP also covers another family member.

Here's to a safe and happy July 4th, and a great second half of 2019. May all your HSA planning go without a hitch!


Tax Facts is a column offering straight up, no-nonsense HSA tax and financial tips, written in everyday language. Look for it on Tuesdays, exclusively on the Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.


Compound It! Cash? Insurance? How about your HSA?

Has your dental or medical office ever offered you a discount for paying cash for treatment? If so, that might make you wonder whether you'd get a better deal if you skipped your health insurance and just paid cash for some of the care you need. Let's take a look at what you need to know about this, and how your HSA can fit into whatever strategy you decide to use.

If a cash discount is available, you're free to take advantage of it. And you can use money from your HSA to pay the bill. You must have coverage under an HSA-qualified high-deductible health plan (HDHP) in order to make contributions to your HSA.

But tax-free withdrawals from the HSA can be made to cover your out-of-pocket costs for any qualified medical expense, regardless of whether a claim is filed with your insurance or what sort of insurance (if any) you have at that point.

That means your HSA funds can be used to pay for things that aren't covered at all under your HDHP, such as dental care, infertility treatment, LASIK, etc. (your HDHP may or may not cover things like this, but either way, your out-of-pocket costs for them can be paid with HSA funds). As is always the case, you can choose to use your HSA funds immediately, or reimburse yourself years or decades later.

When to use cash instead of other forms of payment

If the medical service you're receiving is not covered at all by your HDHP and your doctor, dentist, chiropractor, etc. offers a cash discount, paying cash to get the discount is probably a wise plan, if you can swing it from a savings or cash-flow perspective.

Keep in mind that when the office says "cash payment," they might literally mean you have to show up with cash in hand, not just an immediate payment in the form of a check or debit card (including a card that's linked to your HSA). Find out in advance what it takes to get the cash discount — you don't want to show up with your HSA debit card and find out that you won't get the cash discount if you use it.

But what if the service is covered by your HDHP? This is where it gets a little complicated, and there are several things to keep in mind:

"Covered" means that the health plan will pay some or all of the expense, assuming you had already met your deductible, copays, and coinsurance). But if you have an HDHP, you already know that you need to pay a sizable chunk of money for your deductible before your health plan starts to pay your medical bills.

If you have to pay a bill yourself but it counts towards your deductible, that's considered a "covered" expense. And assuming that you opt to have a claim filed with your insurance, you're going to have to pay whatever rate your insurer and medical provider have negotiated — without any sort of additional discount — even if you pay with cash.

When we refer to non-covered expenses, we're talking about things your health plan wouldn't pay for even after you meet your deductible. Depending on the plan, this can include things like out-of-network care, dental/vision care, cosmetic procedures (which you can't use your HSA for either), etc.

If your HDHP provides coverage for out-of-network care, you can get the cash discount and still submit the claim to your insurance company. Out-of-network providers don't have any contractual arrangement with your insurer, which means there's no negotiated rate. And since it's common for patients to have to submit their own out-of-network bills and wait for reimbursement, this works well with cash-pay scenarios.

Keep this in mind...

You can only use HSA funds for medical expenses that aren't reimbursed by any other entity. So if you see an out-of-network provider, pay cash, and then submit the receipt to your HDHP for out-of-network claims processing, pay attention to the details. If you haven't met your out-of-network deductible and the entire amount is going to be an out-of-pocket cost even after the insurance company processes the claim, you're free to reimburse yourself from your HSA.

But if you've already met your out-of-network deductible and your HDHP is going to be sending you a check to reimburse some of the amount that you paid to the out-of-network provider, you'll only be able to reimburse yourself from your HSA to cover the portion of the bill that isn't paid by your HDHP. If in doubt, it's best to wait until the claim is processed before withdrawing funds from your HSA in situations like this.

If you see an in-network provider, it's up to you to decide whether you want to pay cash, or have the provider submit a claim to your insurance and then send you a bill for whatever you owe after the claim is processed. But there are a few things to understand here:

  • Depending on the size of your deductible, the doctor or hospital might ask you to pay some or all of your deductible in advance. But they would still be submitting your claim to your HDHP, so your up-front payment would not qualify for a cash discount. If you have concerns about the request for up-front payment, you can reach out to your insurer to discuss the issue.
  • HIPAA regulations (45 CFR 164.522) state that as long as you pay the bill in full (ie, whatever cash-pay rate the provider charges), you can ask the provider to not tell your health insurer about the treatment that was provided to you, and they have to comply.
  • If you get a discount by paying cash to an in-network provider, the money you pay won't be counted towards your health plan's deductible or maximum out-of-pocket costs, since a claim won't be filed with your insurer.

Clearly, there's no one-size-fits-all when it comes to whether you should take your provider up on their cash discount offer. It depends on several factors, including whether the service is covered by your insurance, how much care you think you'll need during the year, and of course, whether you have the cash to cover the bill.


Compound It! is your weekly update of achievable, effective, no-nonsense HSA saving and investment advice, delivered by people who make it work in their own lives. For the latest info about your health and financial wellness, be sure to check out the HSA Learning Center, and follow us on Facebook and Twitter.


Compound It! What should you do with HSA funds when retirement time comes?

If you're approaching retirement — or contemplating a retirement that's still decades in the future — your health savings account (HSA) might be playing a role in your overall financial plan. If you've been contributing to your HSA for years and not withdrawing money, you might have a pretty good-sized nest egg squirreled away by the time you're ready to retire.

You might have been cash-flowing your medical expenses over the years — and saving your receipts — instead of paying for them with HSA funds. Or you might have been lucky enough to avoid major medical bills.

So, now you have to decide what to do with the money in your HSA. You won't be able to contribute any more money to your HSA once you're enrolled in Medicare (at age 65 for most people), but the money you've already accumulated in your HSA — plus any future growth in the account — is yours to use.

Hopefully, you'll stay healthy and active well into your golden years, and you might continue to avoid substantial medical costs. In that case, should you just leave the money in your HSA, letting it continue to grow with time? Or should you start to treat your HSA as a regular retirement account and just pay income tax on the withdrawals that aren't used for medical expenses? Or maybe a combination of those two approaches?

As with most things related to personal finances and health care, there's not really a right or wrong answer here, since it really depends on the rest of your circumstances.

What to consider about spending your HSA funds

You can't treat your HSA as a regular retirement account until you're 65. So although HSAs can function much like traditional IRAs, you have to wait a little longer. You can access the money in your retirement accounts — like 401(k)s and traditional IRAs — when you're 59.5 years old. At that point, you'll pay income tax, but not a penalty.

But for your HSA, that doesn't start until you're 65. Unless, of course, you're using the HSA funds to pay for qualified medical expenses, in which case there's never a penalty or income tax on the withdrawals. So, if you're retiring before age 65, your best bet is probably going to be to leave your HSA alone for a while, unless you need it for medical expenses.

Do you have long-term care insurance?

If not, what's your plan for covering the cost of long-term care that you might eventually need? Long-term care is expensive, and Medicare doesn't cover it. Medicaid does, but you have to exhaust most of your assets in order to qualify. If you don't have a plan in mind for how you might fund long-term care needs later in life, leaving your HSA alone might be a smart plan, since those funds can be used to cover the cost of any long-term care that you might eventually need.

And since withdrawals will be tax-free at that point (long-term care is a qualified medical expense), you'll be able to use 100% of the account balance to fund your long-term care costs, without having to worry about setting aside a chunk of it to cover taxes.

Don't forget about required minimum distributions (RMDs)

In most cases, your non-Roth retirement accounts are going to have RMDs that kick in once you turn 70.5 years old. At that point, you're required to start withdrawing some money each year (the IRS determines how much).

But there are no RMDs for HSAs, which means you have the option to just let that money sit in the account until if and when you either need it for medical costs or decide to withdraw it for something else and pay income tax on the withdrawal.

It doesn't have to be "all or nothing"

Maybe your overall plan is to leave your HSA money in the account until you need it someday for expensive medical treatment or long-term care costs. But that doesn't mean you can't also tap into your HSA for a one-time splurge vacation and pay taxes on the withdrawal. There's room for a little fun every once in a while.

Talk with a financial planner

We always recommend it, and with good reason. Speaking with a licensed financial pro can help you get a clear picture of how much money you can spend in retirement and which accounts you should tap first. As always, the information we provide here is a general guide, but you'll want to talk with a professional if you have questions about your specific circumstances.


Compound It! is your weekly update of achievable, effective, no-nonsense HSA saving and investment advice, delivered by people who make it work in their own lives. For the latest info about your health and financial wellness, be sure to check out the HSA Learning Center, and follow us on Facebook and Twitter.


Tax Facts: Let your 2018 taxes help you plan for next year

Was your tax refund smaller than you expected this year? There was plenty of confusion during this year's tax season, as many people were expecting larger tax refunds as a result of the Tax Cuts and Jobs Act that was enacted in late 2017.

But average refunds this year ended up being slightly smaller than they were last year ($2,725 versus $2,780), due in large part to the fact that a smaller amount of income tax was withheld from most employees' paychecks throughout 2018.

So although chances are good that the total income tax you paid for 2018 was smaller than it was for 2017, that didn't translate into larger refund checks for most people. Instead, it resulted in larger paychecks throughout the year, and a slightly smaller average refund. And from a purely mathematical perspective, that's a good thing: A bigger refund just means you gave the federal government a bigger interest-free loan throughout the year, and they're paying it back via a refund.

But while we're thinking about refund checks and tax liability, it's a good time to understand some of the ways you can reduce the amount you pay in income taxes, without reducing the amount you earn.

Let's talk about HSA contributions

You can only contribute to an HSA if your only health insurance coverage is an HSA-qualified high-deductible health plan (HDHP). But assuming you have coverage under an HDHP and are HSA-eligible, contributions to an HSA will certainly check a lot of boxes when it comes to tax advantages:

  • The money you contribute is pre-tax, and you can contribute up to $3,500 in 2019 if your HDHP covers just yourself, and up to $7,000 if your HDHP also covers at least one other family member.
  • [If your HSA contributions are payroll deducted, you'll avoid income tax as well as FICA taxes. If you establish your own HSA and make contributions outside of your employer's payroll system, you'll deduct the contribution amount on your income tax return. In that case, you'll avoid income taxes on the amount you contribute, but not FICA taxes.]
  • Your HSA contributions can be invested or held in an interest bearing account. Either way, any growth in the account is tax-free.
  • You can withdraw money at any time, tax-free, if you're using it to pay for qualified medical expenses. This is true even if you've moved on to a different type of health insurance and are no longer eligible to contribute to your HSA.
  • Once you turn 65, you can withdraw money from your HSA for something other than medical expenses, and you'll just pay income tax. (Basically, from a tax perspective, an HSA can function just like a traditional IRA once you're 65+.)
  • By paying out-of-pocket and saving your receipts, you can let your HSA grow tax-free for years or decades and then have it serve as an emergency fund. You can also think of your HSA as a long-term care fund if you're healthy in your younger years and able to leave money in the account for decades.

Are you contributing to an HSA in 2019?

If so, are you on track to reach your contribution goals? Many HDHP enrollees don't contribute to their HSAs at all. Some don't realize they're HSA-eligible, others aren't aware of the myriad benefits of HSAs, or might be confusing them with FSAs and worried that they'll have to "use-it-or-lose-it" — but that's not the case with HSAs, as the money just rolls over from one year to the next.

And others would like to contribute to an HSA but feel that they don't have enough money to do so. If you're in that camp, remember that you don't have to commit to fully funding your HSA this year; a little money saved is better than nothing. And unlike FSAs — which require you to make your contribution decisions prior to the start of the plan year — you can stop, start, or change your HSA contributions at any time.

So if you're HSA-eligible and not yet funding your HSA, there's no time like the present to start. And if you got a tax refund this year, even if it was smaller than you were expecting, stashing at least part of it in your HSA might be a wise idea, although that obviously depends on your other financial obligations.

How is that going to change next year's tax refund?

In order to avoid the surprises a lot of people experienced this year, it's helpful to understand how your contributions will affect your total tax liability as well as your refund. Since HSA contributions are pre-tax, you won't have to pay income taxes on the amount you contribute. The exact amount you save will depend on your tax bracket and the amount you contribute to your HSA (but for example, if you contribute $7,000 and your tax rate is 22 percent, you'll save more than $1,500 in taxes). So your total tax liability will decrease, assuming your income and other factors stay roughly the same.

But if your HSA contributions are done via payroll, you shouldn't expect a larger refund as a result of your HSA contributions. Instead, your employer will deduct your contributions from your paycheck before your tax withholding is calculated. So you'll get the tax benefits each payday instead of getting a bigger refund.

Your net paycheck is going to be smaller, because you're sending some of it to your HSA. But the reduction in your check won't be as big as the amount you're contributing to your HSA, since the contribution is being made with pre-tax money, whereas it was previously being paid to you as after-tax money.

What if you establish your own HSA?

Even if your employer doesn't offer an HSA, as long a you're otherwise qualified and enrolled in a qualified health plan, you can establish an HSA on your own. In short, you'll be sending post-tax money to the HSA throughout the year, which means you'll need to deduct your contributions on your tax return (Line 25 on Form 1040, Schedule 1). If you don't adjust your income tax withholdings (or estimated tax payments if you're self-employed), you'll likely end up with a larger refund as a result of your HSA contributions, assuming other factors remain unchanged.

If you can afford to contribute to your HSA, doing so is probably a wise move. But the more you understand about exactly how it affects your taxes, the less likely you are to be surprised next year when you're filing your taxes.

As always, the information we provide is meant to serve as a general background. If you have questions about your specific situation, we recommend that you consult a tax professional.


Tax Facts is a column offering straight up, no-nonsense HSA tax tips, written in everyday language. Look for it on Tuesdays, exclusively on the Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.


Tax Facts: Who can I cover with my HSA?

You already know that an HSA is a great way to save for future healthcare costs. You can make tax-free HSA contributions as long as you have coverage under a qualified high-deductible health plan (HDHP).

Then you can withdraw the money to spend on IRS-approved medical costs — still tax-free — or you can just let it keep rolling over, from one year to the next. The money earns interest along the way, and eventually using it as an emergency fund, or as an extra retirement account, to cover your long-term care costs.

But people might be a little fuzzy on whose medical care you can pay for with tax-free HSA money. They don't have to be covered under the same health insurance policy you have, and in some cases you can't use your HSA funds to pay for medical care for a person who is covered under your policy. Let's take a look at how this works.

A quick overview

In Publication 969, the IRS clarifies that you can withdraw tax-free money from your HSA to pay for qualified medical expenses for:

  • Yourself
  • Your spouse (regardless of whether you file taxes jointly or separately)
  • Any dependents you claim on your tax return (your children, or a qualifying relative dependent) and any children who are claimed on your ex-spouse's tax return
  • Anyone you could have claimed as a dependent, but weren't able to because he or she
    • filed a joint tax return (for example, your married teenage kid who files a joint return with his or her spouse)
    • earned more than $4,150 (in 2018), or you (or your spouse, if you file jointly) could be claimed as a dependent on someone else's tax return.

As long as the person is in one of the above categories, you can reimburse yourself for the cost of their qualified medical expenses with tax-free money from your HSA. It doesn't matter whether the person was covered under your HDHP, or even whether they had health coverage at all.

Let's clarify with some examples:

Spouse on Medicare, young adult child on parent's HDHP

You're 60, your husband is 66, and you've got a 25-year-old daughter. You've kept your daughter on your health insurance, because the coverage that her employer offers is more expensive. You've got an HDHP through your employer, which covers you and your daughter. Your husband is on Medicare.

You're allowed to contribute the full family amount to your HSA, because your HDHP is covering both yourself and your daughter. But you can only use your HSA funds to pay for your own medical care and your husband's. You can't use it to pay for your daughter's care, because you can't claim her as a dependent.

This is a good example of how the tax rules (which pertain to HSA contributions and withdrawals) are separate from the insurance rules (which pertain to who is allowed to be covered under your plan).

It's also worth noting that your daughter can open her own HSA, since she's covered by your HDHP but files her own taxes. (She would not be able to contribute to her own HSA if she were still your tax dependent.) She can contribute the full $6,900 to her HSA, since she's covered under a family HDHP.

And if you want, you can make contributions to her HSA on her behalf. She would then be able to withdraw funds from her own HSA to cover her own medical expenses.

Spouses have separate health plans, dependent child covered under university insurance

You and your wife each have coverage through your own employers. You have an HDHP that just covers yourself, while your wife has a non-HDHP for her own coverage. You have a 20-year-old son who is a full-time college student.

He's enrolled in the non-HDHP health insurance plan that his college offers. You and your wife file a joint tax return, and claim your son as a dependent (as long as he's a student, you can claim him as a dependent until he turns 24).

You can contribute $3,500 to your HSA in 2019, since you have self-only HDHP coverage. But you can use the money in your HSA to pay for qualifying medical expenses for yourself, your wife, and your son.

Divorced mom who supports elderly parents and does not have custody of her daughter

You and your ex divorced a few years ago, and your ex, who has primary custody, claims your daughter as a tax dependent. Your elderly parents live with you and you claim them as qualifying relative dependents.

Your parents are enrolled in Medicare, your daughter is covered under your ex's health plan, and you have a non-HDHP plan through your current employer. But your previous employer offered an HDHP, and you stashed away some money in an HSA while you worked there.

You can't contribute any more money to your HSA, unless you switch to another qualified HDHP. But you can use the money that's left in your HSA to cover qualified medical expenses for yourself, your daughter, and your parents (parents are only eligible if qualifying relative dependents, like we mentioned above).

Even though your daughter is not your tax dependent, the IRS considers her to be your dependent (because she qualifies as a dependent for whom you could have claimed) for the purpose of being able to use your HSA funds to cover her medical expenses.

There are a lot of things to keep in mind when it comes to paying for family healthcare with HSA funds. And you should definitely contact your HSA administrator if you have any questions about your own family situation. But know that a little research can result in a lot of security down the line.


Tax Facts is a column offering straight up, no-nonsense HSA tax tips, written in everyday language. Look for it on Tuesdays, exclusively on the Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.


Tax Facts: How HSA contributions change when you switch HDHPs

In order to contribute to a health savings account (HSA), you need to have coverage under an HSA-qualified health plan. These are known as qualified high-deductible health plans (HDHPs), and they're strictly defined by the IRS — it doesn't just mean any plan with a high deductible.

But one of the benefits of an HSA is the continuity they provide. It doesn't matter where you get your HDHP, and it doesn't have to be the same HDHP from one year to another or even from one month to another. Our family has used the same HSA for more than a decade, even though we've had a few different HDHPs over the years.

So if you're going to be switching from one HDHP to another, rest assured that you'll be able to continue to fund your HSA — and withdraw money as you need it — despite the change in your health coverage. But there are a few things you'll want to keep in mind:

Payroll deductions: Pay attention to the details

If your HSA contributions are payroll deducted and you're switching from one job to another, you'll want to re-run the numbers to ensure that your contributions remain on target for the rest of the year. An example will help to illustrate this:

Different payroll schedules

Let's say you're at Job A for January through June, and then switch to Job B right away on July 1, with health coverage effective from day one. We'll say you've got family HDHP coverage through both employers, and you're planning to contribute $7,000 to your HSA in 2019 (that's the maximum that the IRS allows this year, unless you're 55 or older, in which case you can contribute an extra $1,000).

But let's say Job A ran on a twice-a-month payroll schedule, whereas Job B pays you every two weeks: That means Job A would have had 24 pay periods during the year, while Job B would have 26. If you structured your HSA contributions at Job A to be $291.66 each pay period, you'd have ended up with $7,000 in contributions by the end of the year — perfectly on track.

But if you tell the payroll folks at Job B to continue your $291.66 HSA contribution every pay period, you're going to end up contributing too much. You will have already contributed $3,500 to your HSA during the six months you worked at Job A. But Job B still has 13 pay periods left in the year, which would result in an HSA contribution of almost $3,792 if you kept your previous contribution schedule.

Once you totaled up your contributions for the year, they'd be about $7,292. The extra $292 would be considered excess contributions, which means you'd have to go through the process of removing that money (plus any earnings) from the account or pay an excise tax on it.

Different employer contribution levels

This sort of scenario — with a potential for excess contributions if you're not paying close attention — could also happen if Job A and Job B have different employer contribution levels for HSAs. The HSA contribution limits apply to total contributions — from you, your employer, or anyone else who contributes on your behalf.

So if your new employer is going to contribute to your HSA, you'll want to take that into consideration when you're determining how much you should be contributing yourself for the rest of the year.

To clarify, the total amount you contributed during the year would likely be spread across two different HSAs, selected by the two employers. But you'd also have the option to transfer the balance in your original HSA to the new one (the IRS allows this anytime, with no limits on how often you do it, as long as you have the funds sent directly from one HSA to another). The IRS will look at your total HSA contributions for the year, regardless of whether they're all in one account, or spread across multiple accounts.

Switching from one self-purchased HDHP to another

If you purchase your own HDHP and switch from one plan to another, nothing needs to change about your HSA at all. People who buy their own health insurance are generally responsible for establishing their own HSA too, since there isn't an employer involved (note that some small employers that don't offer employer-sponsored health insurance do choose to contribute to employees' HSAs if the employees purchase their own HDHPs — if in doubt, check with your employer to make sure you understand all the benefits they offer).

If you switch from one HDHP to another, you don't need to notify your HSA custodian about the change. You can just continue to fund your HSA as usual, since the onus is on you (as opposed to the HSA custodian) to make sure that you remain HSA-eligible.

Switching from one HDHP to another, but with a gap in coverage

What if you switch from one HDHP to another, but with a gap in between the two plans? Maybe you're uninsured for a couple months, or have short-term coverage or a non-HDHP for part of the year? Now how does it work?

Never fear, the IRS has answers for you! As long as you have HDHP coverage as of December, you're allowed to make the full-year HSA contribution, if that's your preference. But if you do that, you then have to remain HSA-eligible throughout the entire following year.

Alternatively, you can opt to prorate your HSA contributions for the year, in which case the IRS doesn't care whether you remain HSA-eligible during the following year. Here's an overview of how the two options work.

So if your first HDHP covers you for January through April, and then you're uninsured for two months, and then you get a new HDHP that covers you from July through December, you have the option to save the full year's contribution limit in your HSA and then maintain HDHP coverage for the whole next year (which allows you to contribute the full amount to your HSA that year too), or you can opt to put 10/12ths of the HSA contribution limit into your account for the year that you had a gap in coverage.

It might seem daunting to make a switch from one HDHP to another, but you can rest knowing your contributions can continue, with no changes in accessing your savings, even if you have to switch plans.


Tax Facts is a weekly column offering straight up, no-nonsense HSA tax and finance tips, written in everyday language. Look for it every Tuesday, exclusively on the Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.


Tax Facts: Some last-minute HSA thoughts before tax day

It's less than a week until tax day. Does that make you think of your HSA? If not, maybe it should. Here are some questions to ask yourself.

Did you have coverage under an HSA-qualified high deductible health plan (HDHP) in 2018? If so, did you contribute money to an HSA during the year? And if you did make contributions, did you contribute as much as the IRS allows? Probably not, if you're among the majority of HSA owners. According to an Employee Benefits Research Institute (EBRI) analysis, only 13% of HSA account holders contributed the maximum allowable amount in 2017.

Also in the EBRI analysis, the average total HSA contribution from account owners was under $2,000 in 2017, and the average employer contribution was under $900. But the IRS allows total contributions, including money that an employer or anyone else contributes on your behalf, to be much higher than that:

  • In 2018, total contributions could be up to $3,450 for people with self-only HSA coverage, and up to $6,900 for people whose HSA covered at least one other family member.
  • For 2019, those limits have increased to $3,500 and $7,000 (if you're 55 or older, you can contribute an extra $1,000 each year).

Your HSA is a powerful financial tool

...And it's one with a triple tax advantage: Money that you put into the account is pre-tax (either via pre-tax payroll contributions, or via a deduction on your tax return), dividends, interest, and investment gains in the account will accumulate tax-free, and withdrawals are tax-free too, as long as you use the money for qualified medical expenses.

Once you turn 65, you can withdraw money from your HSA for anything you want, without a penalty, although you'll have to pay income tax on the withdrawals if you're not using them for qualified medical expenses. But that means the HSA can be used like a traditional IRA once you're 65, so it can serve as a backup retirement account if that's your preference.

Those are some impressive benefits, but you only get them if you fund your HSA. Fortunately, the IRS gives us a few extra months to get our HSAs funded each year: You have until April 15, 2019 to make some or all of your HSA contributions for 2018.

And even if your HDHP took effect mid-year (as late as December 1), you can opt to make the full annual contribution to your HSA for 2018, as long as you also maintain HDHP coverage throughout 2019 (here's an overview of the rules on that, with details about the contribution options you have if your HSA was only in effect for part of the year).

So if you were HSA-eligible in 2018 and you haven't fully funded your HSA for 2018, take a few minutes when you're filing your taxes to see how much it would change your total tax burden if you bumped up your HSA contribution for last year. You might be surprised at how much your contribution will "pay for itself" via a lower tax bill or larger refund.

Keep an eye on your 2019 contributions too!

If you're getting a tax refund, consider using that money to fund your HSA for 2019 (or for 2018, as long as you do it by April 15).

If your HSA contributions are made via payroll, you can earmark your tax refund for things that you would normally have to cover with your paychecks, and then ask your employer to increase your HSA contributions, either temporarily or for the rest of the year, so that your total contributions for 2019 come as close as possible to the contribution limit set by the IRS.

And remember that since the HSA contributions are pre-tax, the hit to your paycheck might not be as much as you're expecting, since taxes would have eaten up a chunk of that money if you had opted to receive it in your check instead of directing it to your HSA.

Tax season is an excellent time to check in on your overall financial goals, including your HSA goals. It's your last chance to fund your HSA for last year, and it's a good opportunity to make sure you're on track to fund your HSA for this year, especially if you're expecting a tax refund.

And while you're thinking about funding your HSA, it's also a good time to remind yourself that the purpose of an HSA is to ensure both financial and physical health. So check in with yourself and make sure that you're also spending your HSA funds, when doing so is the wisest option.


Tax Facts is a weekly column offering straight up, no-nonsense HSA tax and finance tips, written in everyday language. Look for it every Tuesday, exclusively on the Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.