Important to note is that HSAs are only available if you have a high-deductible health plan (HDHP). If you have this type of healthcare coverage, you are eligible to start a health savings account. HSAs are designed to help people with high-deductible health plans save money tax-free to pay for deductibles and copayments, among other qualified medical expenditures.
Contributions to an HSA account come out of your paycheck before income taxes, which will lower your tax liabilities for the current year. Withdrawals from an HSA that are made to pay for qualified expenses are free of income taxes. You can make tax-free withdrawals from your HSA for qualified medical expenses at any time. If the expenses do not qualify, you may incur a 20% penalty plus taxes on what you withdraw.
HSA-qualified expenses can include items like:
• General medical expenses
• Prescriptions and some over-the-counter medications
• Dental and orthodontics expenses
• Eyeglasses, vision exams and other services that may not typically be covered under insurance
plans, like laser eye surgery
• Lab fees
Employers can also contribute to their employees’ HSA accounts. But unlike with most retirement accounts, contribution limits are inclusive of employee and employer contributions. Regardless of whether your employer contributes, you’ll need to be careful when setting up your payroll deductions for an HSA. If you contribute too much, the Internal Revenue Service (IRS) may impose a 6% tax on the excess contribution.
Health savings accounts are offered by banks and financial services firms. Your employer may have a partner HSA provider already available to you, though you are always free to use an outside HSA. Contributions may simply not be automatically deducted from your paycheck if you choose that option.
If you contribute to or use funds from an HSA, you’ll need to be on the lookout for certain forms come tax season. The IRS requires HSA users to file two tax forms along with their annual tax returns including IRS Form 8889 and IRS Form 1099-SA.
If you’re eligible for an HSA plan and have the extra cash needed to make contributions, it can be a valuable financial tool that provides funds for medical care, solid tax benefits and a potential retirement savings feature.
Click here for more information about Health Savings Accounts.