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Top 10 things HSA participants need to know



We all strive to lead healthy lives, but illnesses and accidents are inevitable, no matter how cautious we are. Health Savings Accounts (HSAs) are a great way to help employees protect themselves financially.

Offering an HSA to your employees can help them take control of their health and prepare for retirement. However, HSAs can be challenging to navigate if you’re unfamiliar with them.

Here are the top 10 things HSA participants need to know about HSAs.

1. HSAs are individually owned

When it comes to healthcare accounts, HSAs stand out for one main reason: They are individually owned. This means participants have complete control over their account, regardless of whether they stay with the same employer or move on to new opportunities.

Once funds are contributed to the HSA, they belong to the participant, who is able to keep the money even if they change employment. Additionally, participants have the responsibility of authorizing changes to the account and determining how the funds are spent.

2. Eligibility can be complex

One of the most important things to know about HSAs is that eligibility can be complex, and it’s not simply a matter of signing up and contributing. To qualify, participants must be enrolled in a high-deductible health plan (HDHP), which can itself be complicated. 

Employers can easily determine:

  • If the employee is enrolled in a qualifying health plan (through the employer), and
  • If they are enrolled in Medicare (and therefore ineligible).

It is harder to determine:

  • If the individual has other coverage that makes them ineligible, and
  • If someone may be claiming them as a dependent.

Common Eligibility Surprises include:

  • Spouse enrolled in FSA or HRA, which automatically covers the employee/individual
  • Receiving VA or Tricare benefits, and
  • Medicare “look back periods.”

3. HSAs are bank accounts

HSAs are a valuable financial tool that allows individuals to save on medical expenses. Think of it as a bank account that’s exclusively reserved for healthcare-related expenses. More than just an account where you can deposit money, an HSA is subject to specific regulations and oversight.

Because it’s classified as a custodial account, it must be held by a designated bank or other authorized custodian. Additionally, the USA PATRIOT Act requires identity verification for HSA participants. The accounts are also subject to Regulation E. Overall, HSAs offer a way to save for medical expenses while adhering to specific banking policies that ensure accountability and transparency.

4. HSAs are a tax-benefit

The tax advantages of an HSA cannot be overstated. Not only can participants make tax-deductible contributions to their HSA, but the money also grows tax-free as long as it is used for qualified medical expenses. In effect, HSAs provide a triple tax benefit.

Contributions made through an employer are typically tax-free, while individual contributions can be reported as an “above the line” deduction on taxes. What’s more, earnings on HSA funds grow tax-deferred, and distributions remain tax-free when used for eligible medical expenses.

HSAs are also reported on an individual’s taxes, with custodians providing 1099-SA and 5498-SA forms that report total distributions and contributions. Employers also report total contributions on W-2 forms. The bottom line: HSAs offer a clear tax advantage that makes them a popular choice for those looking to save money on medical expenses.

5. HSAs grow

Our financial landscapes are ever-changing, and HSAs serve as a valuable tool for those seeking to secure their financial futures. While HSAs offer tax benefits for medical expenses, they also offer a wealth of investment opportunities. By investing in mutual funds or other financial instruments, HSAs can provide an additional route for saving for retirement.

With the potential to earn interest and grow over time, HSAs are proving to be an asset to many individuals seeking long-term financial stability. As these accounts continue to grow, they are set to become an ever-more popular part of many individuals’ financial strategies for the years to come.

6. HSAs are regulated by the IRS

Because HSAs are tax-advantaged accounts, they are regulated by the IRS. It’s crucial to follow the rules to avoid penalties, such as over-contribution penalties or using funds for non-qualified expenses.

HSA limits are set by the IRS each year (no later than June 1):

  • Annual Contribution Limits
  • Minimum Deduction Requirements for Qualifying Plan, and
  • Maximum Out-of-pocket Requirements.

Qualifying health plans must meet certain requirements:

  • Minimum deductible and maximum out-of-pocket expenses
  • Cannot pay out any expenses, except preventive care, until the deductible is met, and
  • Prescription costs must be included in the plan limits.

7. Contribution rules are more like an IRA

HSA contribution rules are similar to an Individual Retirement Account (IRA). One significant similarity is that contributions can be made by employees, their employers, or a third party. This flexibility allows for a variety of funding options. Additionally, tax-free contributions can be made through an election in the Cafeteria Plan, maximizing employee tax savings.

The IRS will limit contributions based on health plan coverage and contribution sources. However, plan participants can still make after-tax contributions as an above-the-line tax deduction until the tax filing deadline. Once a contribution is made to the HSA, participants have complete ownership of the funds.

8. Withdrawals are flexible

Unlike other healthcare accounts that have a “use it or lose it” policy, HSAs allow participants to carry over funds from year to year. Additionally, participants can use their HSA funds for any qualified medical expenses, including expenses for dental and vision care.

In addition:

  • Withdrawals can be taken any time after the HSA is established
  • There is no time restriction on when you must make a withdrawal for an eligible expense. (No run-out or coverage period restrictions) 
  • Participants must retain receipts and documentation of eligible expenses. There is no claim adjudication or verification process. It is between the account owner and the IRS
  • HSA funds can be used for non-medical expenses
  • Prior to age 65, normal tax and 20% penalty apply
  • Age 65 and older, normal tax applies, and 
  • If employees lose HSA-compatible coverage, they can continue to spend the funds in the HSA.

9. HSAs offer long-term savings potential

With the rising cost of healthcare in the United States, it’s becoming increasingly important for individuals to consider their long-term savings options. HSAs offer a unique opportunity for those who prioritize their health and financial planning.

By steadily contributing to their HSA and investing wisely, participants can ensure that they have a significant amount of money set aside for future medical expenses. This approach, over time, can result in a substantial nest egg that can be used for a wide range of healthcare needs, allowing participants to focus on their health and well-being without worrying about financial constraints.

Investing in an HSA truly is a smart choice for those who value their future health and want to take control of their financial future.

10. HSAs require good records 

Maintaining accurate records of all HSA transactions is imperative for employees. It not only helps them during tax filing but also prevents them from making costly errors while making a withdrawal. Keeping records of all contributions, withdrawals and receipts for medical expenses can be arduous.

However, it is necessary to maintain a well-organized system that helps to accurately track and report expenses. Not only will it reassure the employee that they are in compliance with HSA regulations, but it also provides solid documentation in case of an audit.

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