Health Savings Account (HSA)
Have you ever considered how you might go about saving for medical expenses? What about medical expenses you’ll incur when you’re older? One popular option is opening a Health Savings Account (HSA).
What is a Health Savings Account?
A Health Savings Account (HSA) is a personal, private, federally tax-advantaged savings account that allows you to set aside money on a pretax basis to pay for qualified medical expenses today and into retirement.
HSAs are owned by individuals (not employers) and HSAs can be transferred from job-to-job or institution-to-institution, like a 401(k) or IRA. An HSA is not a health care plan but is used in conjunction with all qualifying High Deductible Health Plan.
When saved or invested, HSA funds can accrue interest or investment profits at the federal level. And distributions for qualified medical expenses are tax free at both the federal and state level in New Jersey.
How does an HSA work?
An HSA can be offered through an employer, or you can open it yourself, as long as you meet certain eligibility requirements.
When you open an HSA, you will be issued a debit card that allows you to easily access your funds and you can manage your account online. You can use the funds in the account to pay for eligible health care, dental, and vision expenses for yourself as the account holder, your spouse, or eligible dependents.
You can also reimburse yourself from your HSA if you’ve paid for a qualified medical expense using another form of payment, like a rewards credit card.
Qualifying for an HSA
To open an HSA, you must meet certain eligibility requirements.
- You must be enrolled in a qualified High Deductible Health Plan.
- You can’t have any other health coverage with the exception of ancillary coverage like dental and vision coverage.
- You can’t be enrolled in any part of Medicare and cannot be claimed as a dependent on anyone else’s taxes.
- Finally, neither you as the account holder nor your spouse can be covered by a full-purpose FSA or a full-purpose HRA.
What is a High Deductible Health Plan (HDHP)?
An HDHP is a health insurance plan with a lower monthly premium than a traditional health insurance plan. However, by definition, HDHPs have high deductibles. That means you must pay a larger portion of your health care costs out of pocket before the insurance company starts to pay its share.
To be HSA-eligible, a High Deductible Health Plan must:
- Meet the minimum deductible requirements set by the IRS.
- Meet the maximum out-of-pocket limits set by the IRS.
- Not provide any benefits for a given year until the deductible is met.
Refer to healthcare.gov for this year’s minimum deductible and maximum out-of-pocket amounts.
What are Qualified Medical Expenses?
Qualified Medical Expenses are expenses that the IRS allows you to pay for with an HSA. These include copays, coinsurance for health care services, dental expenses, and qualified vision expenses.
View the complete list of the IRS eligible medical and dental expenses.
How do HSA contributions work?
- You, your employer, or both can contribute funds to your HSA. Contributions are usually deducted pretax from your paycheck and sent to your HSA by your employer or payroll vendor. You can also contribute funds directly to your HSA and write them off as tax deductions later.
- A relative, friend, or anyone else can contribute to your HSA, as long as the total contributions don’t exceed the annual limit.
- You can make contributions as either a lump sum at the beginning of the year or distribute your contributions over the course of the year — as a regular payroll deduction, for instance.
- Whatever money you’ve put into your HSA, plus any interest it has earned, is available to spend on qualified medical expenses. You may also choose to open an optional investment account and invest some of your funds.
- Making your contribution as a lump sum means you will have that full amount available to pay for eligible expenses right away.
- You can’t contribute to your HSA once you’re enrolled in Medicare — even if you’re still working and have an HDHP through your employer. But you can continue to use any money left in your HSA to pay for qualified medical expenses after you’re enrolled in Medicare, including paying your Medicare insurance premiums.
How much can you contribute to an HSA?
- The amount you can contribute to the HSA changes, typically on an annual basis. Refer to the IRS Limit on Contributions for this year’s amounts.
- If you are 55 or older, you can make an extra $1,000 “catch-up” contribution to your HSA each year.
What are the advantages of an HSA?
HSAs have several tax advantages that make them an appealing way to save money for health care costs:
- HSA contributions are tax-deductible at the federal level.¹ This means your taxable income for the year is reduced by the amount of money you put into your HSA.
- The money you withdraw is tax-free as long as you use it to pay for qualified medical expenses.
- You don’t have to pay any federal income taxes on the interest your HSA earns.
In addition, HSAs have other benefits:
- There are no “use it or lose it” time limits. The funds you contribute remain in your account indefinitely until you use them.
- An HSA is “portable,” meaning it stays with you even if you change jobs or leave the workforce.
Important facts about HSAs
- Any HSA funds you withdraw for non-medical purposes before age 65 are considered taxable income, and the IRS also charges you a 20 percent penalty for making these withdrawals.
- HSA expenses can be audited, so you should keep receipts for all your purchases.
Is an HSA a good fit for you?
Opening an HSA makes sense if you:
- Are enrolled in a qualified High Deductible Health Plan
- Want your savings to earn tax-free interest1,2
- Want your unspent savings to carry over and grow from year to year and travel with you if you leave your job
- Are looking for an opportunity to save for retirement
How to get a New Jersey health insurance plan with a Health Savings Account
AmeriHealth New Jersey offers an HSA option with several of our qualified High Deductible Health Plans. If you’re considering a plan with a high deductible, adding an HSA can save you money.
Learn more about Health Savings Accounts
Refer to IRS Publication 969 for more information about HSAs.
AmeriHealth New Jersey does not provide tax or legal advice. Please consult with your own tax or legal advisor regarding the tax and legal implications of a Health Savings Account.
¹In New Jersey, although employee contributions to an HSA are pretax for federal income tax purposes, contributions are after-tax for state income tax purposes.
²New Jersey account holders do not receive the same tax-free growth as provided at the federal level. However, distributions for qualified medical expenses are tax free at both the federal and state level in New Jersey.