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Learning to Love Your HSA: A Valentine's Day Story

April 21, 2020

Ah, February, the Month of Love.

How better to celebrate the most romantic short month of the year than by learning to love your Health Savings Account, or HSA for short? See? We even have a cute nickname for it – like sweetie or darling. HSA just has an adorable ring to it, don’t you think? Often, I feel HSAs deserve our love but rarely receive it. This happens with a lot of aspects of the health insurance world, and I think it has to do with lack of education on the subject. Many people don’t know enough about an HSA to love it wholeheartedly. And then, many people don’t know enough about them to choose not to love them, either! So, think of this as your first date with an HSA. We’re going to talk about HSAs at a basic level, getting to know a few of their good qualities and their bad qualities. Stay awhile, get to know each other, and don’t be afraid to order dessert. It is a holiday, after all!

Your First Date with an HSA

According to our friends at the IRS, a Health Savings Account “is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur” ( ¿En inglés por favor? Basically, an HSA is a very special savings account that can be attached to your health insurance plan. It allows you to contribute pre-tax dollars into the account, and the money in the account can be used to pay for doctors’ visits, hospital bills, prescriptions, and other qualified medical expenses. HSAs are becoming a more common option in health insurance offerings today, both on the employee benefits side and the individual health insurance side. The main reason being that health plans that include HSAs generally have lower premiums each month. Benefit number one of having an HSA plan: think of it as a super chill, cheap date. Another impressive benefit of an HSA is the tax savings. “Contributions, interest, and withdrawals for qualified health expenses are not taxed” ( Unused funds in the account can also be rolled over from year to year. Finally, any unused funds that have accumulated in the account by retirement age can ultimately be used for long-term savings and investing solutions down the road.

Your Second Date with an HSA

You’re on a date; you’re starting to get to know this new exciting being called an HSA, but you think to yourself, “Okay, what’s the catch? When something seems too good to be true, it generally is, right?” And the cynics live to see another day! In short, you’re right: there’s a reason that when given the option of an HSA, some people opt out. Now hypothetically you’re on your second date with an HSA, where everyone was on their best behavior during the first date but now you’re starting to learn things that you may not necessarily love about your new friend. For example, you’re limited in how much money you can contribute to your HSA every year. Though the funds roll over each year, an individual cannot contribute more than $3,500 throughout 2019. For a family covered under an HSA, that contribution limit increases to $7,000. These limits generally change annually, so it’s important to keep track of any changes occurring before the new year! I mentioned previously that HSAs have cheaper monthly premiums, and it’s important to know why. An HSA can only be implemented with a “High Deductible Health Plan,” also called an HDHP for short. (More cute nicknames!) The monthly premiums for HDHPs and HSAs are lower because you’re working with a health insurance plan where you would have to pay more money yourself should something with your health go wrong. The idea behind the HSA is that the money you contribute to your account can help offset the higher deductible cost. If you’re not making regular contributions to your HSA, though, and do not have a lot of funds in the account, you could be at risk to pay high health insurance claims out of your own pocket.

What Makes an HSA Tick?

Like any relationship, you want to make sure you know what to prepare for when becoming involved in an HSA. You need to know how the account functions and what makes it tick. It’s important to consider what is and is not considered a qualifying medical expense when using your HSA dollars. Below is a list of medical expenses that qualify for tax-free withdrawal from an HSA or FSA, along with a list of expenses that are NOT covered with HSA funds. For a complete list of qualified Medical and Dental Expenses for use on preparing 2018 Returns, see IRS Publication 502.

Medical Expenses That Qualify for Tax-Free Withdrawal from an HSA or FSA:

  • Acupuncture
  • Alcohol & drug treatment
  • Ambulance costs
  • Anesthesia
  • Artificial limbs and teeth
  • Automobile modifications for handicapped
  • Bandages
  • Birth control pills
  • Braille books and magazines
  • Chiropractic care
  • Christian Science practitioners
  • Contact lens and solutions
  • Co-pays
  • Corrective eye surgery
  • Crutches
  • Dental fees, including exams and cleanings
  • Dental implants
  • Diagnostic tests
  • Eye examinations
  • Eyeglasses, including prescription sunglasses and reading glasses
  • Fertility enhancement
  • Guide dogs (purchase, training and maintenance)
  • Hearing aids and batteries
  • Hospital services
  • Inpatient therapy
  • Insulin injections
  • Laboratory fees
  • Long-term care insurance (restrictions apply)
  • Medical insurance premiums while unemployed
  • Medicare coverage
  • Mental/nervous treatment
  • Nursing car
  • Obstetrical expenses
  • Organ transplants
  • Orthodontic treatment (restrictions apply)
  • Oxygen and equipment
  • Periodontal fees
  • Premiums for COBRA continuation
  • Prescription drugs
  • Psychiatric care
  • Smoking-cessation programs
  • Telephone for the deaf
  • Transportation for medical care
  • Vaccinations
  • Walkers
  • Weight loss treatments (restrictions apply)
  • Wheelchairs
  • X-rays

In addition, HSA funds can be used to pay for certain insurance premiums. The following items can be paid for through an HSA, but not with an FSA.

  • Long-term care insurance premiums (restrictions apply)
  • Medical insurance premiums while unemployed
  • COBRA continuation premiums

The following is a partial list of items that are usually NOT covered under an HSA or FSA.

  • Cosmetic surgery and procedures
  • Diaper services
  • Domestic help fees (for nonmedical services)
  • Electrolysis
  • Funeral expenses
  • Health insurance premiums
  • Homeopathic items
  • Illegal operations and treatments
  • Liposuction
  • Marriage counseling
  • Maternity clothes
  • Over-the-counter products for general health (such as vitamins, toothpaste, lotion)
  • Over-the-counter drugs (to alleviate illness or injury)
  • Personal use items
  • Physical or massage therapy for general health
  • Premiums for Medigap
  • Swimming and dancing lessons, even if recommended by a doctor
  • Teeth whitening

Over-the-counter Purchases No Longer Permitted Without a Prescription, Effective Jan. 1, 2011

  • Acid controllers
  • Allergy and sinus
  • Antibiotic products
  • Anti-diarrheals
  • Anti-gas
  • Anti-itch and insect bite
  • Antiparasitic treatments
  • Baby rash ointments/creams
  • Cold sore remedies
  • Cough, cold and flu
  • Digestive aids
  • Feminine anti-fungal/anti-itch
  • Hemorrhoidal preps
  • Laxatives
  • Motion sickness
  • Pain relief
  • Respiratory treatments
  • Sleep aids and sedatives
  • Stomach remedies