What is an HSA and how does it work?
Health Savings Accounts, also known as HSAs, are quickly becoming a popular way for people to manage their healthcare expenses. Your HSA provider may offer a card to use with your account and you may be surprised at all the everyday health items that are eligible to be purchased. The convenience of HSAs makes them a smart option for employers and their employees. You might be wondering, how does an HSA work? As you read on, you’ll soon find out many financial advantages that can be used for both now and later.
What is an HSA?
An HSA is a type of savings account that is specifically designed to help individuals save for eligible healthcare expenses. Like a personal savings account, an HSA is owned by the employee. It also offers a triple-tax advantage to eligible individuals who are enrolled in a qualified High-Deductible Health Plan (HDHP), although this is not the only requirement. With an HSA, money goes in tax-free, savings may grow tax-free, and when used for eligible items, withdrawals are tax-free. Here is more information about the key features that you could take advantage of by participating in an HSA.
1. Standalone Accounts
Some HSAs are standalone accounts. This means that the account is independent of your HDHP and employer. It will stay with you if you change employers or leave the workforce.
The contributions made towards your account are pre-tax so they reduce your taxable income. Also, an employee, employer, family member, or any other person can make contributions on behalf of an eligible individual.
3. Tax-free Growth
If you make contributions but don’t need the money right away, you’ll be able to earn interest or possibly invest your contributions and develop a cash cushion to help your financial peace of mind. Being able to earn interest or other investment growth is one thing that sets an HSA apart from other reimbursement accounts. Although investment growth is an appealing possibility it’s important to know that earnings are not guaranteed. It’s possible to lose money too. These opportunities make an HSA a great long-term savings vehicle with tax-free growth.
4. Tax-Free Distributions
When HSA funds are used towards eligible medical expenses, the distributions aren’t taxed. These funds can be used to pay for eligible healthcare expenses that your medical plan doesn’t cover. A few examples are over-the-counter medications, sunscreen, or mental health counseling. They can even cover the previous year’s expenses if the HSA was established before the expense occurred. For example, you can use HSA dollars to cover costs until you reach your deductible. Then, you can use the funds to pay copays until you reach your out-of-pocket limit.
You can withdraw funds from your HSA at any time but if it’s for any reason other than to pay for an eligible expense, you will pay a 20% penalty in addition to income tax. After the age of 65 or if you become disabled, you’ll be able to withdraw funds without penalty, but the amount will be taxed as ordinary income if not used for eligible expenses.
With their steadily growing demand, American Fidelity has helped employees across the country navigate their accounts since their introduction in the early 2000s. HSAs can cover copays, prescriptions, contacts, and a lot more for yourself, your spouse, or eligible dependents. You can browse the HSA eligibility list and take advantage of what it can save you.
This blog is up to date as of June 2023 and has not been updated for changes in the law, administration or current events.