Health Savings Account Rules You Need To Know

Female Patient And Doctor Have Consultation In Hospital Room.
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A health savings account, or HSA, is an account you can use to pay for medical expenses. One of its main benefits is that there is no tax on the funds, whether kept in the account or withdrawn to pay for qualified medical expenses. But not everyone qualifies for an HSA. Keep reading to learn more about HSA rules to help you determine if you qualify.

Key Takeaways

  • Personal HSA contributions are tax-deductible and payroll deductions are pre-taxed.
  • Any interest earned is tax-free.
  • The annual contribution limitation of a self-only HSA is $3,850 in 2023.
  • The contribution limit for a family coverage HSA is $7,750 in 2023.
  • You can carry interest and unused funds from your HSA from year to year.
  • An HSA comes with tax penalties if used incorrectly.

Health Saving Account: How It Works

A health savings account can help you save money by paying for qualified medical expenses through a special savings account. The contributions made on your HSA are on a pre-tax basis, and withdrawals for eligible medical expenses are tax-free. To qualify for an HSA, you must have a high-deductible health plan (HDHP) with a lower monthly premium but a higher deductible.

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Your health insurance deposits a certain amount into your HSA every month to help you pay for medical expenses. This amount varies depending on your insurance plan. You can also choose to put extra money into your HSA up to a specific limit set by the government.

Federal employees can have pre-tax money taken from their pay and deposited into their HSA. You can use that money to pay for your share of your deductible or other qualified medical expenses.

Using money from an HSA can help you save on healthcare costs. Your HSA covers deductibles, copays and coinsurance without paying taxes on the money. However, you usually can’t use money from an HSA to pay for health insurance premiums.

Are There Any Health Savings Account Rules?

There are a few rules for health savings accounts that you should know to determine whether you are eligible. An HDHP that meets the 2023 minimum deductible and out-of-pocket cost limit is necessary. If you have any other type of health plan, you cannot open an HSA.

  • An individual HDHP has a $1,500 minimum deductible and a maximum out-of-pocket cost of $7,500.
  • A family HDHP has a $3,000 minimum deductible, and the maximum out-of-pocket cost is $15,000.
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The second rule is if you have Medicare benefits or any first-dollar coverage plan, you are not eligible for an HSA. Additionally, you do not qualify for an HSA if someone places your name as a dependent on their tax return.

Finally, there is the 12-month rule or last month rule. Under this rule, if you were HSA-eligible but lost your eligibility due to a change in coverage, you can continue to make contributions to your HSA for 12 months. The rule lets you continue to save for and pay for qualified medical expenses with tax-advantaged funds. However, this rule only applies in certain circumstances. Besides the few limitations of these rules, anyone can open an HSA.

What Are Some Examples of HSA-Qualified Expenses?

You can use HSA funds to cover costs that your insurance doesn’t. However, not all of them are qualified. Some examples of qualifying expenses include:

  • Ambulatory costs
  • Acupuncture
  • Annual physical examinations
  • Bandages
  • Braille books and magazines
  • Contact lenses
  • Hearing aids
  • Psychiatric care
  • Psychological therapy
  • Qualified long-term services

Are There Benefits To Having a Health Savings Account?

Having an HSA comes with multiple benefits if you are eligible. Some of them are:

  • The ability to deduct the funds deposited in an HSA from income paid on federal income tax.
  • Covering qualified medical expenses like deductibles, copays and coinsurance, tax-free.
  • There is no federal income tax on the money in the account, interest earned or for qualified withdrawals.
  • Your funds have no expiration date, even if you change your job or after you retire.
  • In some cases, you can use your account to cover eligible expenses for your spouse and dependents despite the lack of coverage through their HDHP.
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What Are the Downsides to a Health Savings Account?

Although an HSA has multiple perks, it also has some drawbacks. Some of the most prominent are:

  • If you remove funds from your HSA before you turn 65 and use it for non-qualified medical expenses, you must pay income tax and a 20% tax penalty.
  • You cannot have an account if someone claims you as a dependent.
  • If you cannot meet the financial demands of a high-deductible health plan, you cannot qualify.
  • If you remove money from your HSA after turning 65 and use it for non-qualified medical expenses, you still have to pay income tax on that amount, but you will not pay the 20% tax penalty.

Final Take

Overall, an HSA can be a beneficial tool to save money and pay for qualified medical expenses. However, you still must keep in line with the health saving account rules. It is essential to carefully weigh the potential benefits and drawbacks of an HSA before deciding if it is the right option for your healthcare needs.

FAQ

Here are the answers to some commonly asked questions about health savings accounts.
  • Where can I find HSA-eligible plans?
    • HSA plans are available through the Health Insurance Marketplace, Small Business Health Options Program or other sources outside the Marketplace. These plans are available in states that use HealthCare.gov.
  • Can I fund my HSA gradually?
    • Yes, you can fund your HSA gradually or all at once, depending on your circumstances.
  • Can I cash out my money if I have an emergency?
    • Your HSA is yours, and you can cash out your funds anytime in an emergency. However, remember that you will need to pay the penalty and that the IRS taxes those funds after you do so.
  • Can I withdraw my HSA funds from an ATM?
    • You can withdraw your HSA funds from an ATM using a bank-issued debit card. When doing so, use the "checking account" tab to withdraw your funds.
  • What is the 12-month rule for HSA?
    • The 12-month rule means that if you were HSA-eligible but lost your eligibility due to a change in coverage, you can continue to make contributions to your HSA for 12 months. The rule lets you continue to save for and pay for qualified medical expenses with tax-advantaged funds. However, this rule only applies in certain circumstances.
  • When can you withdraw HSA funds without penalty?
    • You can withdraw HSA funds without penalty after you reach age 65 or if you become disabled, but the amounts withdrawn will be taxable as ordinary income.
  • What happens to unused money in a health savings account?
    • You can carry interest and unused funds from your HSA from year to year.

Information is accurate as of Jan. 9, 2023. 

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

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About the Author

Hiba Boutary is a freelance writer with a public relations degree from her native Beirut. She has been ghostwriting for over a decade, covering various topics such as finance, software, real estate, human resources, business and legal. Hiba is the co-founder of a digital agency and is based in Brooklyn, New York. She frequently travels to Beirut and New Delhi and is working on a debut collection of short stories.
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