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.


Tax Facts: Should I itemize my medical expenses or use the money in my HSA?

If you had significant medical expenses last year, or if you're anticipating significant medical expenses this year, you might be wondering whether you'd be better off itemizing your expenses or paying them with money from your HSA.

To clarify an important point: You can't do both, as that would be double-dipping — the money in your HSA is already pre-tax, so if you use HSA funds to pay your medical bills (or reimburse yourself for them later on), you can't deduct these expenses on your tax return.

Let's start with a reminder that each person's financial situation is different, and there's no right or wrong answer here. We'll provide an overview of how each option works, but you'll want to carefully consider your own circumstances and consult a tax professional if you have specific questions.

Deducting your medical expenses

Medical expenses can be deducted on your tax return if you itemize your deductions, but the specifics have changed a bit over the last several years. You can only deduct medical expenses that are more than a certain percentage of your adjusted gross income (AGI).

Prior to 2013, that limit was 7.5%. As of 2013 (under the Affordable Care Act), it changed to 10%, but the Tax Cuts and Jobs Act (H.R.1) temporarily reset the threshold to 7.5% for 2017 and 2018. For 2019 and beyond, it has returned to 10%.

So what does that mean in terms of dollars and cents? Let's say your total medical expenses in 2018 were $9,500 and your AGI was $50,000. How much can you deduct? First, you calculate 7.5% of $50,000, which is $3,750. You're allowed to deduct your medical expenses that exceed that limit, so you have to subtract $3,750 from your $9,500 total. That leaves you with $5,750 that you can deduct.

Now let's say you're planning for this year — the numbers will be a little different, since the threshold has changed. If your AGI is $50,000, you'll only be able to deduct medical expenses in excess of $5,000 (10% of your AGI). So if your total medical expenses are still $9,500, you'll only be able to deduct $4,500 for 2019.

IRS Publication 502 will help you figure out what counts as an eligible medical expense. In general, the criteria are fairly broad — most reasonable expenses can be included, as long as you paid them yourself using after-tax funds.

A key part of this decision is that you have to itemize your deductions in order to deduct medical expenses (note that if you're self-employed and you purchased your own health insurance, you can deduct the premiums you paid without itemizing your deductions, using Line 29 of Form 1040 Schedule 1.

If you purchased your own health insurance (on an after-tax basis) and you're not self-employed, you can include the premiums you paid in your total medical expenses when you're determining how much you'll be able to claim as an itemized deduction).

Starting with 2018 taxes, the itemize-or-don't-itemize question changed quite a bit, as the Tax Cuts and Jobs Act significantly increased the standard deduction. As a result, only about 12% of tax filers are expected to itemize deductions—most filers are better off with the standard deduction. But if your total itemized deductions (including medical expenses above the allowable threshold) are larger than the standard deduction, itemizing might end up being the best option for you.

This is important if you're planning ahead too: If you know that you're anticipating substantial medical expenses, it might be a good idea to also go ahead and get those dental implants or LASIK that you've been considering (assuming you can swing it financially) and have everything done in the same year.

That way, you'll maximize your medical expenses, increasing the amount that's over 10% of your AGI and ultimately increasing the total itemized amount you'll be able to deduct on your tax return. But do some back-of-the-envelope estimating first; you don't want to find out after the fact that you went through all that and still end up being better off with the standard deduction.

(Of course, we don't know your specific situation -- be sure to speak to a licensed financial professional before making any determinations about your needs.)

Using your HSA

If you don't claim your medical expenses as an itemized deduction, you can use your HSA funds to pay for them — either directly or by reimbursing yourself later on (as long as your HSA was already established when you incurred the expense, you can reimburse yourself at any point in the future).

So let's say you have an HSA-qualified high-deductible health plan (HDHP) and an HSA, but you only have $500 in the HSA. You know you're going to need a surgery this year that will leave you on the hook for your $5,000 deductible, but you don't anticipate having enough deductions to make it worth your while to itemize your deductions when you file your taxes. Fortunately, your HSA can still allow you to use pre-tax money to pay your health insurance deductible.

Assuming your HDHP covers just yourself (no other family members), you can contribute up to $3,500 to your HSA in 2019 (plus another $1,000 if you're 55 or older). Even without interest or investment gains (or the flip side of that — investment losses), that would put your balance at $4,000 by the end of the year.

That won't cover your full deductible, but the good news is that — assuming you continue to have HDHP coverage — you'll be able to contribute the other $1,000 to your HSA in 2020 and then reimburse yourself for the full amount of your deductible at that point (you can reimburse yourself with whatever's in your account in 2019 and then make up the difference in 2020; you don't have to wait until you have it all in the account).

So if your hospital will allow you to set up a payment plan, this is an approach that will let you use pre-tax money to cover your out-of-pocket costs, even though you won't be itemizing your deductions on your tax return.

Again, we're here to share some suggestions that have worked for us. But this is not meant to serve as financial advice -- always speak to a qualified professional before making changes to your own financial 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.


Compound It! Understanding common HDHP acronyms

HSA, HMO, PPO, EPO, POS… one of these things is not like the other. Yes, they're all related to health insurance, but did you know that your HSA-qualified plan will also be either an HMO, PPO, EPO or POS?

To catch you up, here's a quick rundown of what these acronyms stand for:

  • HMO (health maintenance organization): Requires a referral from your primary care doctor before you can see a specialist. Out-of-network care is generally not covered.
  • PPO (preferred provider organization): You can see a specialist without a referral from your primary care doctor. Out-of-network care is covered, but with higher out-of-pocket costs.
  • EPO (exclusive provider organization): You don't need a referral to see a specialist, but you may need to get prior authorization from your insurance company before you get treatment. Out-of-network care is generally not covered.
  • POS (point of service): You'll likely need a referral from your primary care physician in order to see a specialist. You'll also often have coverage for out-of-network care (with higher out-of-pocket costs) as long as you get a referral.

It's common to hear people say they're trying to decide "between an HSA and an HMO" for example, or "between and HSA and a PPO."

But the terms HMO, PPO, EPO and POS are used to describe the way the health plan is managed in terms of the provider network, whether out-of-network care is covered, and whether you'll need a referral from your primary care physician in order to see a specialist. However, those things have no bearing on whether a plan is HSA-qualified.

So when you're considering the coverage options, you're actually looking at two separate questions:

  • Do you want a plan that's HSA-qualified? If so, you'll need to select a high deductible health plan (HDHP). If it's compatible with the rules that the IRS has for HSA-qualified plans, it should be labeled as such.
  • What sort of plan management do you prefer in terms of the plan's provider network? This is where the HMO, PPO, EPO or POS question comes in, although you may not have all those types of coverage available to you.

If you want to be able to contribute to an HSA, you'll need to have coverage under an HSA-qualified HDHP, which is strictly defined by the IRS. If you enroll in any other additional type of medical coverage, even if it has a high deductible, it'll likely disqualify you from being able to make contributions to an HSA.

But it doesn't matter what sort of managed care setup your HDHP has.

The IRS doesn't care whether your HDHP covers out-of-network care, or whether it requires you to get a referral from your primary care doctor before you see a specialist.

There may only be one HDHP option available to you — if that's the case, you'll need to enroll in it in order to make HSA contributions. But if you're in the enviable position of having multiple HDHPs available to you — maybe you're buying your own coverage in a highly competitive market, for example — you can pick whichever one best suits your needs.

So the takeaway here is this: Whatever HDHP you pick will also be either an HMO, a PPO, an EPO or a POS. Those acronyms describe what the health plan requires of you, in terms of things like obtaining prior authorization and referrals, and whether the plan is going to cover care outside its provider network.

But they don't have anything to do with whether your plan is HSA-qualified, since that depends on the benefits themselves (i.e., the size of the deductible and out-of-pocket costs, and whether anything is covered before the deductible).


Compound It! is your weekly update of achievable, effective, no-nonsense HSA account, 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: Clearing up HSA mistakes and ineligible expenses

"I just found out that you can't use HSA funds to pay health insurance premiums, but I withdrew $2,000 from my HSA last year to pay for my health insurance. What do I do now?"

This scenario is more common than you'd think — you're certainly not the first person to withdraw money from your HSA to pay for something that isn't actually a qualified medical expense.

And make no mistake, health insurance premiums can be confusing. The portion of your premiums that you pay yourself can be included in your total medical expenses if you're itemizing your deductions on your tax return (assuming you paid them on your own and they weren't paid with pre-tax dollars via an employer plan), and they can also be reimbursed from an HRA (health reimbursement arrangement).

But unless you were on COBRA, receiving unemployment benefits, or age 65+ and on Medicare, your health insurance premiums can't be paid using tax-free HSA money, as clarified in Publication 969.

How big of a problem is this?

If this situation applied to you, and you leave things as they stand, you're going to owe income tax and a penalty on that $2,000 when you file your tax return. As far as the IRS is concerned, spending HSA money on most health insurance premiums is the same as spending it on a beach vacation; neither one is an eligible expense.

That means you'll have to include the $2,000 in your taxable income on your tax return, and you'll also owe an additional 20% penalty on that amount — a painful surprise, for sure.

But depending on your HSA administrator's rules, you may be allowed to put that money back in your HSA and avoid the taxes and penalty, assuming you have enough money on hand to do that.

What's the official IRS position on these mistakes?

In 2004, when HSAs were brand new, the IRS published answers to 88 FAQs about HSA rules. Questions 37 and Question 76 pertain to situations like yours.

In question 37, the IRS clarifies that "if there is clear and convincing evidence that amounts were distributed from an HSA because of a mistake of fact due to reasonable cause." This means the account holder has until the tax deadline for that year's returns (typically April 15 of the following year) to return the money to the HSA and avoid income tax and the additional penalty that would otherwise have applied.

(Note that question 37 refers to a 10% penalty, but that was increased to 20% under the Affordable Care Act.)

However, question 76 makes it clear that HSA custodians (e.g., the bank or brokerage firm that holds your HSA funds) are not required to allow account holders to return mistaken distributions (there's some additional paperwork involved for them if they do allow the money to be returned).

So, your first step would be to call your HSA custodian and ask them if they'll let you return the mistaken distribution. If they will, and assuming you have the money on hand, you'll need to send it back to your HSA by April 15.

Can my HSA custodian help?

You'll want to make sure that you use your HSA custodian's "return of mistaken distribution" form when you send in the money (here's an example of what these forms look like). Otherwise, your HSA custodian would assume that the $2,000 is a regular HSA contribution, and that would further complicate your situation.

The form will include language indicating that by signing it, you're attesting to the fact that you genuinely believed the expense in question was an allowable use of tax-free HSA funds, but found out later that it was not.

So, it has to be within the realm of reason — if you actually used your HSA funds to take a beach vacation (and were not reimbursing yourself for prior medical expenses), you can't use the return of mistaken distribution method for putting the money back into your HSA.

And when I file?

You probably already received Form 1099-SA from your HSA custodian (and Form 5498-SA if you made contributions to your HSA last year). But once you return the money to your HSA custodian, they should issue you a corrected Form 1099-SA, which shows any other withdrawals you made last year, but not the $2,000 that you've returned to the account.

Once all of that gets sorted out, you can proceed with your taxes, and in the eyes of the IRS, it will be as if you never withdrew that $2,000 from your HSA last year.

As always, we provide general background information, and we recommend that you talk with a qualified tax professional to sort out the details of your specific situation.


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: Planning ahead for a growing family

Are you planning for a baby in the near—or not-so-near—future? If so, have you given any thought to how you can best use your HSA to cover the expenses you're likely to incur, and how you can maximize your HSA benefits while you're growing your family?

You probably already know that you can use your HSA funds to cover the out-of-pocket medical costs that go along with having a baby. That includes the obvious costs (like having to meet your health plan's deductible), but it also includes things like ovulation predictors and, as long as you get a letter of medical necessity, the cost of hiring a doula.

Save accordingly...

You should expect that you'll meet your health plan's deductible the year you have a baby, and in most cases, the full out-of-pocket maximum—so be sure you know how much that is. But there is also a wide range of products for babies and moms that can be purchased with tax-free HSA funds.

You'll also want to get familiar with HSA-eligible products and services ahead of time, so that you can either use HSA funds to pay for them or save your receipts and reimburse yourself from your HSA at some point in the future.

Consider contributing your personal max...

If you have an HSA-qualified high-deductible health plan (HDHP), it's a good idea to be fully funding it in preparation for the cost of having a baby. In 2019, you can contribute up to $3,500 if the HDHP covers just yourself, and up to $7,000 if it covers at least one other family member.

Keep in mind that if you currently have self-only coverage under your HDHP and you're planning to add your new baby to your health plan, you'll be allowed to contribute more to your HSA at that point.

If your HDHP already covers at least one other family member, the addition of your new baby won't change your contribution limit, since the full family limit applies anytime you have two or more people covered on the plan. But if you currently have self-only HDHP coverage and you add your baby to your plan, that makes you eligible to contribute the family amount ($7,000 in 2019) to your HSA.

There are two different ways you can approach that change: You can make your contributions on a prorated basis using a limit of $291.66 per month for each month before you add the baby to your plan (that's 1/12 of $3,500) and then using a limit of $583.33 (1/12 of $7,000) for each month when you and the baby are both covered by your HDHP (these amounts can change annually, so if you're having a baby in 2020 or beyond, the numbers could be a little different).

But you also have the option to contribute the full $7,000, as long as your baby is added to your plan by the first of December. This is explained in a notice that the IRS published in 2008. But it's important to understand that if you go that route, you also have to make sure that you continue to be eligible to contribute to your HSA throughout the entire following year.

You aren't required to make contributions during that year, but you do have to remain HSA-eligible. If you don't, you'll end up paying income tax plus an extra 10% tax on the amount you contributed to your HSA that was over what you would have been allowed to contribute using the prorated approach.

Don't forget past expenses...

As you plan for your growing family, keep in mind that you can use HSA funds to reimburse yourself for expenses that you incurred in the past, as long as the HSA was already established when you incurred the expense.

So, as long as you already have your HSA when your baby is born, you can put money in it later on and then take that money back out, tax-free, to pay yourself back for the out-of-pocket costs from the birth.

If you don't have the money up-front and have to set up a payment plan with your doctor or hospital, this can be a good way to ensure that you're getting to use tax-free money to cover your out-of-pocket costs, even if you're having to stretch the repayment out over a longer period of time.

A quick word about adoption

The costs associated with adoption are not considered qualified medical expenses, so you can't use your tax-free HSA funds to cover them (you're always able to withdraw money from your HSA for whatever purpose you like, but you'll be subject to income tax and a 20% penalty if you use the money for something other than qualified medical expenses). But as soon as the child becomes your tax dependent, his or her medical expenses can be covered using tax-free funds from your HSA.


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.

Living Well

Compound It! When you should consider spending HSA funds

In this column, we spend most of our time discussing how HSAs are a great tool if you want to save for future medical costs, including long-term care expenses that might crop up down the road. And if you tend to be healthy from one end of the year to the other, you might have found that you're not currently withdrawing anything from your HSA.

If that's your situation -- congratulations! There's no doubt that it's a good idea to build up some funds in your HSA. But spending money on your health now is also a good idea, even if you feel like you're perfectly healthy. You know the line about an ounce of prevention and a pound of cure? It's definitely one to keep in mind when you think about the money in your HSA and whether you should be saving all of it for a rainy day, or spending some of it now in an effort to ward off those rainy days.

First, the ounce of prevention...

The Affordable Care Act made preventive care much more accessible for millions of Americans, by requiring health insurance plans — including HSA-qualified high-deductible health plans (HDHPs) — to cover preventive care for free, without any deductible or copay. But that rule doesn't apply to grandfathered health plans, and it also doesn't mean that all preventive care is free. The list of free preventive care is extensive, but it's certainly not all-encompassing.

Assuming your HDHP isn't grandfathered, you'll find that it fully covers quite a bit of preventive care, regardless of whether you've met your deductible. Take advantage of that — you're paying for it with your premiums, so don't let it go to waste.

And it's all very scientific; the preventive services that health plans are required to cover are the services that are rated "A" or "B" in the United States Preventive Services Task Force recommendations, recommended by the Health Resources and Services Administration, or recommended by the CDC's Advisory Committee on Immunization Practices. In other words, your health plan is likely going to cover the preventive care that scientists and doctors have determined is most essential.

Is everything covered?

Those lists are always evolving, and there may be services that you and your doctor consider important that aren't covered for free by your health plan. And that's why your HSA funds are there! If your preventive care checkup includes tests or diagnostics that aren't covered by your health plan, don't be afraid to spend some money from your HSA to pay for them. But here's a tip -- considering waiting until the claim is processed by your insurer, because the price might end up lower than what's initially billed.

For example, your doctor might want to run some blood tests during your checkup. Some blood-work (like cholesterol screening) is considered preventive care under ACA rules, and would be fully covered by all non-grandfathered health plans. But insurance plans are not required to pay for a complete blood count (CBC), which means that if you have one done, you might have to pay for some or all of the cost (UnitedHealthcare has a helpful guide for understanding how this works).

There are lots of examples of things that we think of as preventive care, but that our health plans do not have to cover. Vitamin D screening, comprehensive eye exams, maintenance medications, a visit to a dermatologist for a full-body skin cancer screening, adult dental cleanings, breast cancer screening beyond basic mammograms (a few states do require coverage for this), vaccines related to travel abroad… and those are just a few.

If you're young (or not-so-young!) and healthy and have been stashing money in your HSA, keep in mind that investments in your health now can pay big dividends years or decades down the road. Find yourself a dermatologist and get your skin checked out. Then get your eyes checked (we're talking about more than just a vision test, too).

Make an appointment with a therapist if you feel like your mental health isn't where you'd like it to be. Visit a chiropractor if doing so makes you feel better. Buy yourself an acupressure mat (they may look simple, but they feel fantastic!).

Don't ignore anything, even the small stuff

A few years ago, I noticed a little bump under my arm, and I fretted about it for several weeks before making an appointment to get it checked out. Since I have an HDHP and hadn't met my deductible, I had to pay for the visit in full. It cost me a couple hundred dollars to find out that the bump was nothing to worry about, but the peace of mind was priceless.

One thing that all of these services have in common? You can use HSA funds to pay for them. And while saving money for future medical bills should absolutely be a priority if you have an HSA, you also have to prioritize your health right now. Don't be afraid to take money out of your HSA to pay for things that will help you stay healthy in the long run. Your future self will thank you!


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: Is maxing out your HSA contribution still part of your 2019 goals?

If you have a health savings account (HSA), how much are you contributing to it, and how much of that money are you withdrawing each year to cover your day-to-day medical expenses? If you're like most people, according to analyses by the Employee Benefit Research Institute (EBRI) and Lively, you're contributing far less than the maximum allowed amount, and then withdrawing nearly all of it during the course of the year.

As always, know that we're not tax or financial professionals, and the following should not be construed as investment advice. Always speak with a licensed professional before making any tax or financial decisions. Instead, the following is one author's view from her experience with HSAs.

Using your HSA funds to cover your day-to-day medical costs is a smart choice: You're using pre-tax funds, which means you don't have to earn as much money to pay those bills.

But if you're spending nearly all of the money in your HSA each year and you're not contributing as much as possible to the account, you're leaving money on the table and missing an opportunity to set yourself up for a less stressful future. In 2019, the contribution limits are $3,500 if your HSA-qualified health plan covers just yourself, and $7,000 if it covers at least one other family member.

According to the EBRI report, among HSAs that received contributions in 2017, average employer contributions amounted to $895, and individuals contributed an average of $1,949. And that's only looking at HSAs that received contributions; only half of HSA owners made contributions to their accounts, and more than a third of all HSAs didn't receive any contributions at all in 2017, including employer contributions.

Some of these unfunded accounts are likely owned by people who are no longer eligible to make contributions, but it's clear that some HSA owners are eligible to contribute to their accounts yet aren't doing so.

A little perspective...

Back in 2017, the maximum allowable contribution (including employer contributions) was $3,400 for people who had self-only coverage under an HSA-qualified health plan, and $6,750 for people whose HSA-qualified health plan covered at least one other family member. But only 13% of HSA account holders contributed the maximum allowable amount.

The EBRI analysis found that 95% of HSAs that received contributions in 2017 ended the year with an average balance of $2,764 remaining in the account to roll over into the coming year. But that includes the balances in accounts that have been growing for many years—it's not a balance that the average account holder is achieving after one year of contributions.

The Lively analysis found that the average HSA account holder ended up withdrawing 96% of their 2018 contributions to pay for medical care during the year.

That's not necessarily a bad thing. Out-of-pocket health care costs continue to increase, and the purpose of HSAs is to have access to pre-tax funds when we need them to pay medical expenses. In other words, the money is there to be used, and people are obviously using their HSAs to cover their medical bills. If most of us were also contributing the maximum allowable amounts to our HSAs, there wouldn't be much more to discuss.

But that's not what's happening...

Some HSA holders aren't contributing anything to their accounts, and among those who are stashing money in their HSAs, average contributions are much smaller than the maximum allowed.

So here's a reminder that an HSA is not the same thing as an FSA. With an FSA's use-it-or-lose-it rules, the best strategy is to set your contributions to be very close to what you expect to spend on medical needs during the year. But if you have access to an HSA, you don't need to limit your contributions to what you think you'll spend on health care that year.

Instead, you can focus on contributing as much as possible, up to the limits established by the IRS. Some people are already contributing the maximum allowable amount and still having to withdraw all of it. People with chronic conditions who have to meet their health plan's out-of-pocket cap every year may have little choice but to continually drain their HSA.

But let's say you have self-only coverage under an HSA-qualified health plan, and you're anticipating about $2,000 in medical costs this year, including some dental work, new eyeglasses, and a few doctor visits. Contributing $2,000 to your HSA and then using that money to pay those bills is certainly a smart move, since it will save you several hundred dollars in taxes.

But what if you set yourself a stretch goal of adding an additional $35 per week to your HSA, starting on March 1? By the end of December, your total contributions would hit $3,500. That includes the $2,000 that you were already planning to contribute and withdraw during the year, but instead of an HSA balance near zero, you'd be heading into 2020 with $1,500 sitting in your HSA.

Or maybe not…

Maybe you end up breaking your arm in November and having to withdraw everything that's in the account. That might not have been in your plans, but you'd still be better off than if you hadn't put that extra money in the account throughout 2019.

And if the year does go according to your plans, you'll have an extra cushion of money in your HSA next year, making any unforeseen medical situations less stressful than they would otherwise have been.

You never know when a major medical situation could arise, but you'll never regret having some tax-free money tucked away to pay medical bills. The option to let unused HSA funds roll over from one year to the next is one of the best perks of these accounts, but you only reap that benefit if you plan to contribute more than you think you'll need to spend in a given year.


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: A quick view of short-term health plans and HSAs

Short-term health insurance plans have been in the news quite a bit for the last few years. The Obama Administration issued regulations in 2016 limiting short-term plans to three months and prohibiting renewals. Then in 2018, the Trump Administration issued new regulations allowing short-term plans to have initial terms of up to 364 days, and to be renewable (if the insurer offers that option) for up to three years. Only about a third of U.S. states have currently embraced these new federal rules.

The new regulations took effect in October 2018, in time for open enrollment in the ACA-compliant individual health insurance market. To complicate matters, the ACA's individual mandate penalty was eliminated as of January 2019. So, while people who relied on short-term plans prior to 2019 were subject to the ACA's individual mandate penalty (unless they qualified for an exemption), that's no longer the case.

The discussions surrounding short-term health insurance plans have been tricky. So let's cut through the noise and clarify how these plans work and what consumers need to understand.

You can buy a short-term plan at any time…

...if you're healthy and plans are available in your area.

If you're buying your own health insurance, ACA-compliant plans are only available during open enrollment (November 1 to December 15 in most states) or during limited special enrollment periods triggered by qualifying events. Employer-sponsored plans are also only available during open enrollment or a special enrollment period.

But short-term plans can be purchased year-round, if they're for sale in your state (click on your state on this map to see if plans are available).

You (almost) certainly can't contribute to an HSA while you have a short-term plan...

...but you can withdraw money that's left over in your HSA.

In order to contribute to your HSA, you must have coverage under an HSA-qualified high-deductible health plan (HDHP). And the IRS defines what constitutes an HDHP.

The IRS rules for HDHPs don't specifically preclude short-term health insurance plans. It appears to be possible for a short-term plan to be designed so that it meets the definition of an HDHP, and at least one company is marketing short-term plans that claim to be HSA-compliant.

But in almost all circumstances, short-term plans are not HSA-qualified. So you'll have to stop making contributions to your HSA while you have coverage under the short-term plan. You can, however, continue to use any remaining funds you have in your HSA to pay out-of-pocket qualified medical expenses while you're covered by a short-term health plan.

Short-term plans have a lot of holes...

...but they're far better than being uninsured!

Short-term plans are a lot less expensive than full-price coverage in the regular individual market. But that's because they cover a lot less (if you're eligible for premium subsidies in the exchange, you might find that ACA-compliant health insurance is actually less expensive than a short-term plan, while also providing far better coverage).

Short-term plans do not have to cover the ACA's essential health benefits. The benefits that are most often excluded are maternity care, prescription drugs, and mental health care, but insurers are free to design short-term plans however they wish (within the parameters set by each state, which vary considerably from one state to another).

Short-term plans can also have higher out-of-pocket limits than the ACA allows for other plans, and can place limits on the total amount they'll pay for your care. They can also reject applicants altogether due to medical history, and generally have blanket exclusions for any pre-existing conditions.

All of those factors combine to explain the much lower prices that insurers charge for short-term plans: Essentially, these plans are only covering unforeseen medical conditions that arise in people who were healthy when they bought the plan, and some high-cost services (like prescriptions) might not be covered even in that case.

But with that said, if you're otherwise uninsured—and unable to enroll in your employer's plan or an ACA-compliant individual market plan until the annual open enrollment period—buying a short-term health plan is a far better choice than remaining uninsured.

Keep in mind, however, that relying on a short-term plan is certainly a gamble. You might remain perfectly healthy, but what if you get diagnosed with a chronic condition and need medications that cost a lot more than expected each year? The point of health insurance is to provide a safety net that covers not only the things we might expect, but also the things that blindside us from out of the blue.

So if you end up using a short-term health insurance plan in 2019, it's probably wise to plan to transition to better quality coverage—offered by your employer or purchased in the individual market—during the next annual enrollment period or during a special enrollment period if you experience a qualifying event.

And when you're selecting a plan, give HDHPs at least a second glance, as enrolling in an HSA-qualified option will give you access to all the benefits of being able to contribute to an HSA.


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: What to expect from your HSA on your tax return (Part 2)

Last week, we talked about what to expect as far as tax forms from your HSA administrator, and how your HSA contributions are handled on your tax return. But what if you need to take money out of your HSA? The previous article touched on the fact that your HSA administrator will send you (and the IRS) Form 1099-SA if you had any withdrawals from your HSA during the year.

How does it affect your tax return?

Withdrawals from your HSA are addressed in Part II of Form 8889. This is where you'll include the amount shown on your Form 1099-SA, and you'll also have to say how much of the money was used for qualified medical expenses.

If you withdrew money from your HSA and didn't have qualified medical expenses, this is where the IRS is going to add the distribution amount to your taxable income and also charge an additional 20% tax. (If you're disabled or age 65+, the extra 20% tax doesn't apply).

But as long as you used the money for a qualified medical expense, there are no taxes or penalties for the withdrawal — and remember that you can reimburse yourself for a prior year's medical expense using tax-free HSA funds, as long as your HSA was already established when the medical expense was incurred.

If you took money out of one HSA and moved it to another HSA using a rollover, that will show up as a distribution (on Form 1099-SA) from the first HSA, and as a rollover contribution (via Form 5498-SA) to the second HSA.

But when you're reporting all of this on your tax return, there's a line where you'll account for the fact that you just moved the money from one HSA to another, thus avoiding taxes (as long as you completed the rollover within 60 days). Keep in mind that you can avoid having to account for this in the future if you ask one HSA to send the money directly to another HSA, instead of sending it to you for you to then send to the second HSA.

Part II of Form 8889 doesn't change anything about Part I, where you calculate your tax deduction based on your HSA contributions. Even if you ended up withdrawing the entire amount that you put into your HSA, you still get to avoid paying income taxes on the full amount of the contribution.

This is why you'll hear us say that you can't afford to not fund your HSA. Even if every penny that you contributed was ultimately needed to pay medical bills during the year, the fact that you put the money into your HSA first and then used it to pay medical bills — as opposed to just using it to pay medical bills — meant that you didn't have to pay income taxes on that money.

The fact that you ended up having to withdraw it (as long as you used it for medical expenses) doesn't change the fact that you don't have to pay taxes on it.

To sum this up with some numbers...

Let's say you earned $50,000 in 2018, and contributed $3,000 to your HSA. If you're self-employed and you sent the money to your HSA administrator yourself, you're going to deduct $3,000 from your income when you file your taxes (you'll do this on line 25 of Form 1040, and you'll use Form 8889 to determine whether there are any adjustments to the amount you should put on that line).

But if your HSA contributions were payroll deducted and sent to your HSA administrator by your employer, your W-2 is going to show an income of $47,000 instead of $50,000, because the HSA contributions have already been deducted. So you won't be deducting them on your tax return.

And in both cases, it doesn't matter how much you end up withdrawing from the HSA (assuming you use the withdrawal for qualified medical expenses). You don't have to pay taxes on the contributions, regardless of whether you end up withdrawing all of it or none of it during the year. And you do not have to pay taxes on any interest, dividends, or investment gains that you earn in your HSA.

When it comes to HSA contributions, withdrawals and your tax return, it can get a little complicated if you end up contributing too much or withdrawing money without a qualifying medical expense.

But otherwise, it's pretty straightforward. As applicable, your HSA administrator will send you Form 5498-SA, showing how much you contributed during the year, alongside Form 1099-SA, showing how much you withdrew. You'll compile the information in Form 8889 when you file your taxes, and continue to reap the tax advantages of using an HSA.

As always, please note, we're not tax or finance professionals. Be sure to speak with a qualified professional before making any tax and finance decisions.


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.