Understanding the HSA
Established by the Health Insurance Portability and Accountability Act of 1996, an HSA is a health spending account that is available to any person who has a high-deductible medical insurance plan. HSA plans are funded using after-tax dollars and offer a tax-preferred savings option. HSA accounts may be offered by employers or they may be opened outside of company-offered plans through banks, credit unions, and other trustees who are approved by the SEC to handle these types of accounts.
HSAs are individual accounts (like IRAs) and may not be opened jointly. Funds in heath spending accounts may be kept liquid (e.g. cash) or my be invested in stocks, bonds, mutual funds, or certificates of deposit (CDs). Funds deposited into an HSA (within the established limits) are allowed to be deducted from taxable income on the depositor’s tax return. Those who are self employed may not deposit funds to their HSA on a pre-tax basis, but instead must do so on an after tax basis. Employers may also make deposits on behalf of the employee to an HSA. However, this does not allow the account holder to exceed the annual limits.
Using HSA Funds
The US Department of the Treasury clearly explains all of the rules regarding HSAs. Health spending accounts are similar in nature to an individual retirement account in so far as there are limits to the amount that may be deposited; funds may be invested and the account holder controls the funds. Unlike health flexible spending accounts, these funds do not have to be used annually. The funds may continue to accumulate in the HSA until they are needed. Because of the nature of these accounts, those who invest in them often wonder if it is possible to do an HSA rollover to an IRA account. As per the rules of the program, it is not possible to roll these accounts into an IRA or other qualified retirement account.
The funds in an HSA may be used for any qualified medical expense for the account owner, a spouse, or a child per IRS Publication 502, which lists all allowable expenses. Account holders need not be concerned about losing the funds in their HSA when they change medical plans. Those who are no longer covered by a plan that has a high deductible are allowed to leave funds in their HSA account. For those who lose their jobs, they may be able to use funds from their HSA account to pay COBRA payments while they are out of work.
Retirees who have an HSA account are allowed to use their HSA balances to pay certain medical insurance payments when they retire. The funds may not be used for supplemental Medicaid coverage but may be used for any out-of-pocket expenses including co-pays and Medicaid premiums.
While it is not possible to make an HSA rollover to an IRA account, these accounts still offer many benefits. It is critical to note that unlike flexible spending and other health care accounts, HSA accounts do allow the owner to designate a beneficiary. Those who have a medical plan that has a high deductible may find that an HSA is a solid investment for their needs. As with any other type of financial decision, those who are considering an HSA should speak with a qualified tax representative to review their individual circumstances.
Sources and image credits
US Dept of Treasuiry: Managing your HSA: https://ustreas.gov/offices/public-affairs/hsa/faq_managing.shtml
HSA Frequently Asked Questions: https://ustreas.gov/offices/public-affairs/hsa/faq_setup.shtml
IRS Publication 502: Health Coverage Information: https://www.irs.gov/publications/p502/index.html
Department of Health and Human Services: https://upload.wikimedia.org/wikipedia/commons/1/15/US-DeptOfHHS-Logo.svg
US Department of Treasury: https://upload.wikimedia.org/wikipedia/commons/6/65/US-DeptOfTheTreasury-Seal-AltColors.svg