How does it work?

What is an HSA?

When you get a bill after going to the hospital for a routine or unexpected visit, do you find yourself subconsciously holding your breath while you look for the total cost out of pocket? You’re not alone. 17.8% of Midwesterners had medical bills past due between 2009 and 2020.

At Availa Bank, we want to help you reduce stress associated with medical bills and avoid making hard decisions when you’re not feeling your best. We offer HSAs (health savings accounts) that can help you cover the cost of medical expenses not covered by insurance. An HSA is like a personal savings account, except the money in the account can only be used for medical expenses.

Never considered an HSA before? Don’t worry, we’ll help you learn everything you need to know to make an informed choice.

What does an HSA cover? 

As the name suggests, an HSA has to cover medical expenses. If you are below the age of 65, you cannot use the money in your HSA for anything that is not considered a medical expense by the IRS without incurring a penalty or fine.

For example, if you take money out of your HSA for non-medical expenses before age 65, you will have to pay income taxes on the money you take out and pay an additional 20% penalty unless you are disabled or die. However, if you are 65 or older and take the money out for nonmedical expenses, you won’t have to pay a penalty, but you will have to pay taxes on it.

You may be surprised with what is considered a medical expense vs. what is not. For example, you can’t use your HSA for a gym membership (even if it’s recommended by a doctor) if it is just to be used to stay in shape/maintain good health.

However, you can use an HSA for things like expenses related to accommodations made to a home for a disability (ex. widening doorways to fit a wheelchair). For a complete list of what qualifies as a medical expense, you can check out the IRS website: Publication 502 (2020), Medical and Dental Expenses | Internal Revenue Service (irs.gov).

It’s important to remember, any time you use the funds for a nonmedical expense, you must self-report it. If not, it may result in an audit and more fines/penalties down the road.

Who is covered under an HSA? 

HSAs have limits on how much you can save in them, depending on the number of eligible members in your family. It’s important to clarify who is officially covered before you start to put money in your account. Any HSA account will cover you, your spouse, and any dependents on your tax return. For more details on that, read here.

How do I set up an HSA? 

Not everyone can open an HSA. To qualify, you must have a high-deductible health insurance plan. That plan must be your only health insurance, not including dental, vision, disability, and long-term care insurance. You also must be under the age of 65 to start one. You can open one at your current financial institution or your employer may offer their own HSA option for you to choose from.

How much money can I put in my HSA each year? 

The IRS limits how much money you can put into your HSA each year, at $3,600 for individuals and $7,200 for families (the limit for both is set to go up in 2022). You don’t want to exceed your maximum, as you will be charged a 6% penalty. If you are enrolled in Medicare, you also can no longer continue to put money in your HSA.

However, if you’re getting close to retirement (age 55-64), you can make what’s called a “catch-up” contribution up to $1,000 over the current limit to help pay for medical costs in retirement.

What is the difference between an HSA and an FSA? 

Health savings accounts are different from a flexible spending account in that the money you put into an HSA is yours that you can take with you if you change jobs or retire. You can also roll over the entire amount left unspent in an HSA each year, unlike a flexible spending account.

Is an HSA pre-tax or tax deductible? 

Any money you put in an HSA is tax-free. Any interest the HSA earns is also not taxable. However, if you owe money to the IRS, they can levy your HSA. As mentioned before, you will also have to pay taxes on the amount if you take it out of the account for non-medical purposes.

Make sure you keep full records of everything you pay for using your HSA, including receipts and statements you receive related to those expenses. If you open an HSA at Availa Bank, you will be provided with a debit card and checks to use for expenses. Always make sure you double check when you use your debit card or checks to make sure you don’t use the wrong ones on health purchases.

Any qualifying expense you pay for with your HSA cannot later be claimed as a medical deduction expense on your tax return. When you’re getting ready to file your tax return, any money deposited by your employer into your HSA will be listed in Box 12 of your W-2. Your contributions or those from anyone other than your employer will be included on Form 5498 to show how much was deposited.

What are the Pros & Cons of getting an HSA Account? 

Pros

• You, your employer, a relative, a friend, or even a complete stranger can contribute to your HSA throughout the year, as long as it stays within the limits set by the IRS.
• Your contributions aren’t included in your gross income and as such are not included in federal income taxes and often state income taxes as well.
• If you make contributions to your HSA after tax, you can subtract them from your gross income on your tax return which will reduce your tax bill.
• You can roll any unused money in the account over into the next year.
• Your money travels with you, whether you change employers, health insurance plans (as long as it’s still high deductible) or retire. It is basically your money to use as you decide.
• Many HSAs are convenient as you can have a debit card or checks to use for prescription medication and other expenses right away.

Cons

• You are required to have a high-deductible health plan.
• Any illness you encounter is often unpredictable, making it hard to know how much to budget for in health care expenses.
• Medical care costs can be hard to find when you’re comparing hospitals and procedures.
• If you are older or get sick often, it can be harder for you to put aside money in an HSA vs. a younger, healthier person.
• If you worry about always having money in your HSA, it may lead you to avoid getting medical care when you need it so that you can save the money for a future medical issue.
• If you take money out for nonmedical expenses, you will have to pay taxes on it and may face other penalties.
• You must be organized and keep all receipts as proof for the IRS.

Is a Health Savings Account Right for me? 

Only you can decide if a health savings account is right for you, based on your personal financial needs as well as your health status. If you are relatively young and healthy, an HSA could be perfect for you. If you’re close to retirement and want to boost some savings, you might want to try an HSA. However, if you’re older and in bad health, it may be better for you to research other savings accounts for your healthcare costs. Whatever your needs, an Availa banker is always here to help answer questions and guide you to the right product or service. We’re AVAILAble for you, so give us a call or stop by your local branch today!