A Simple Breakdown of HSA Rules and Limits

March 19, 2020 · 7 minute read

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A Simple Breakdown of HSA Rules and Limits

How is your medical insurance plan working for you? Yep, thought so. If it’s leaving a bit to be desired, you may be eligible to save additional funds for both planned and unforeseen medical expenses while reducing your taxable income.

A health savings account (HSA) is an IRS-approved way to help get a better handle on your medical-related expenses. Before we drill down, here are some key things to know about an HSA:

HSA Rules

If you’re a part of a high-deductible health insurance plan (HDHP), you may also qualify for an HSA. More specifically, according to federal guidelines , you can open and contribute to an HSA if you are:

•   Covered on that HDHP as of the first of the month
•   Not covered by any other non-HDHP plan (some exceptions are allowed—ask your HR rep)
•   Not enrolled in Medicare
•   Not claimed as a dependent on someone else’s tax return

For 2020, your HDHP out-of-pocket expenses cannot exceed $6,900 (for yourself only) and $13,800 (for the family plan). You must have a minimum deductible* of $1,350 (for yourself only), and $2,700 (for the family plan).

*A deductible is the amount you have to pay for medical expenses until the insurance kicks in 100 percent.

HSA Contribution Limits

Every year, the IRS determines how much you can save in your HSA.

For 2020, your maximum contribution limit for the year is $3,550 if you’re single, and $7,100 if you have a family plan.

If you’re an adult age 55 or older, you can add an extra $1,000 to the account.

Setting Up an HSA With Your Employer

At work, setting up the HSA account is typically a cinch: You can request automatic, regular contributions directly from your payroll.

If Your Employer Doesn’t Offer an HSA

Many employers offer HSAs (ask your HR department). If not, you can open one at your current bank or explore your options online.

Is There a Minimum Deposit Requirement?

It’s totally up to you regarding how much you sock away in your HSA account. Remember, the government imposes a ceiling on annual contributions but not a floor.

How You Access Your HSA Account

There are a few ways to access your HSA funds. You might be issued a debit card—or, if you’re old school, checks—that are linked to your HSA account. Or you could submit receipts to the HSA entity that holds the account.

You could use the debit card to pay any uncovered medical bills online or over the phone, or use it at an ATM to withdraw cash for that copay or other medical-related expenses (remember to record and report it). It is important to remember though that not all HSA providers have the same processes/policies.

What Are the Eligible Medical Expenses Allowed?

HSAs can cover the expense of deductibles, copays, and coinsurance. There also may be some other expenses that your regular medical plan doesn’t cover that you can pay for with your HSA account, like dental work.

To find out which health expenses qualify for HSA payments, consult IRS Publication 502, Medical and Dental Expenses . Some surprising qualified expenses may include acupuncture, fertility services, chiropractors, alcoholism treatment, psychiatric care, certain therapies and counseling, and nursing services. There are many others.

What an HSA Cannot Cover

Insurance premiums, in most cases. Sorry. Some other common expenses that are not covered are: baby supplies, elective procedures, gym memberships, and other general products for well-being.

What If You Use Your HSA or Non-Medical Expenses?

You’re going to pay taxes on those withdrawals. If you’re under age 65, you can be sure of paying a penalty on that amount as well.

What Tax Advantages Does an HSA Offer?

Your contributions to your HSA accounts are tax deductible. You don’t have to pay taxes on any of your HSA funds while they sit in the account and are invested as you see fit.

You also don’t pay taxes on any withdrawal for qualified medical-related expenses. (Again, save your paperwork). Because the IRS taxes your income after you make HSA contributions , you will be taxed on less income. Earn $50,000? Put $3,000 into your HSA, and you get taxed on $47,000.

An added benefit of HSA contributions is that if your employer offers an HSA through a Section 125 Cafeteria Plan, your contributions will also avoid Federal Insurance Contributions Act (FICA) taxes. Avoiding FICA taxes on your contributions only applies if the contributions are made directly through payroll.

What If You Change Health Plans or Jobs?

Your HSA is portable! Your HSA funds remain available and can roll over into a new HSA if you get a different job. This is also true if you retire.

How Does an HSA Differ From a Flexible Spending Account (FSA)?

An HSA has a longer life—it rolls over year after year. An FSA doesn’t do that. With an FSA, it’s often “use it or lose it” during the course of the year.

This means that HSAs can be leveraged to cover short-term medical expenses, but also can be used to supplement your retirement savings since it can grow over time.

After retirement (at age 65 or older), HSA funds can be withdrawn similar to traditional IRAs, penalty-free, though you’d still have to pay taxes if the withdrawals aren’t medical-related.

Who Can Contribute to Your HSA?

Anyone. It can be your employer, your spouse, your parents, or a generous, kindly relative.

It costs you nothing to ask, and there is no penalty for someone other than you contributing. (Though keep in mind that contributions other people make still go toward your limit.)

Can You Contribute to an HSA Throughout Your Entire Life?

Most of your life. Once you reach age 65 and enroll in Medicare, you can no longer contribute to an HSA. However, you can still use the money that remains in your account for out-of-pocket medical expenses.

Also, if you’re still working at age 65, and not enrolled in Medicare, you can still contribute until you do enroll in Medicare.

What Are the Disadvantages to an HSA Account?

A high deductible is a high deductible. You can save as much as you can and still not completely meet an obligation like that, especially if it’s unexpected. You may never build enough funds for uncovered expenses, like certain surgeries.

You may also tend to think and rethink certain medical-related expenses in order not to drain your HSA account: “Do I want to use the money for this procedure, or would it be safer to keep the money where it is for now?”

Also, save those receipts—you’ll have to account for every transaction and prove that HSA withdrawals and payments are medical-related expenses.

While we’re on the subject of disadvantages, make sure you are aware of any fees your HSA charges. These could include maintenance fees and usage fees. Some accounts waive the fee if you are able to maintain a certain minimum balance.

Making HSAs Work as an Investment Vehicle

You don’t have to let your HSA just sit there like a lump. You can make it work for you. You could invest your HSA in mutual funds, stocks, or other vehicles.

The reason, of course: to make more money to use toward medical expenses. It’s very chill: You don’t have to take any minimum distributions at age 70 ½, like some other accounts make you do. Instead, you could let it sit there and compound.

If you’re contributing to your HSA through a payroll deduction at work, it won’t be subject to FICA taxes. That’s the income tax that is put toward Social Security and Medicare, which leaves you with more money to invest.

How SoFi Could Help You Make the Most of Your HSA

You’re probably going to have questions regarding the best way to invest your HSA funds. It’s okay, everybody does. As a SoFi member, you’ll have complimentary access to our Financial Planners, who are on call to give you personalized advice at no charge.

Your investment in your health shouldn’t be looked at in isolation. Make an appointment with a financial planner today.

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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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