Health savings account

A health savings account (HSA) is an employee-owned account that can be used to pay for qualified healthcare expenses, including the annual high deductible health plan (HDHP) deductible, copayments, and more.

Who can have an HSA

To open and contribute to an HSA, you

  • must be covered by an HSA-compatible health plan, such as the HDHP offered through the Board of Pensions;
  • cannot be covered by any other medical plan that is not an HSA-compatible health plan, including a spouse’s medical plan;
  • cannot typically be enrolled in a healthcare flexible spending account (unless the FSA is a limited scope FSA);
  • cannot be enrolled in Medicare or Tricare;
  • cannot be claimed as a dependent on someone else’s tax return, and
  • must be a U.S. resident.

How it works

HSAs are considered tax advantaged because, under Internal Revenue Service (IRS) rules, you don’t pay taxes on your contributions, any investment growth is tax-free, and so are withdrawals for qualified expenses. The IRS decides what expenses can be paid through your HSA (see Qualified Expenses). 

Here’s how an HSA works:

  1. You decide how much to contribute to your HSA for the coming year, subject to IRS limits (this is called your election).
  2. The amount elected will be deducted on a pretax basis from your paycheck in equal amounts and credited to your HSA over the course of the year.
  3. When you have a qualified expense, you decide whether to
    • use HSA funds to pay for the expense; or
    • pay for the expense out of pocket and allow the HSA balance to grow.
  4. You may use HSA contributions as they are deposited in your account.
  5. The HSA earns interest tax-free; you also may invest your account when the balance reaches $1,000. Withdrawals for eligible expenses are also tax-free.
  6. Unused HSA funds roll over from one year to the next with no limits.
  7. You own your HSA, so it goes with you if you change medical plans, start a new job, or retire.

Contributions

You may contribute to the HSA up to annual limits set by the IRS. The annual limits for 2020 are as follows:

  • $3,550 if enrolled for Member-only coverage*
  • $7,100 if covering any family members*

If you will be 55 or older during the year, you may make additional catchup contributions of up to $1,000.

Your employer may also contribute to your HSA; you are not taxed on these contributions. Both your contribution and any employer contributions count toward the annual IRS limit.

HSA contributions are exempt from federal income and FICA (Social Security and Medicare) taxes. HSA contributions are also exempt from SECA taxes paid by ministers. Under current IRS rules, you may not contribute to both an HSA and a healthcare FSA unless the FSA is a limited scope FSA. The healthcare FSA available to you typically will not be a limited scope FSA.

*Up from $3,500 and $7,000 in 2019

Qualified expenses

You may use your HSA funds for your own qualified healthcare expenses or for qualified expenses for any family member that you can claim as a dependent for tax purposes. The family member does not need to be enrolled in the Medical Plan.

Qualified expenses are the medical, dental, and vision expenses that can be claimed as a tax deduction. Examples include, but are not limited to, deductible and copayment amounts, dental or orthodontia treatment not covered by the Dental Plan, and prescription drugs. Eligible expenses are outlined in IRS Publication 502 (Medical and Dental Expenses).

Important: You are responsible for making sure your HSA funds are used to pay for qualified expenses. If your HSA funds are used for expenses that are not qualified, the amount you used will be subject to federal income tax, with an additional 20 percent tax penalty if you are under age 65. Keep copies of itemized bills to show you used your HSA funds to pay for qualified expenses, in case of an IRS audit.

How to enroll

Your employer will tell you how to make your elections and deduct your contributions from your pay. Your employer will also work directly with Further, the HSA administrator, to set up your account. Once enrolled, you will receive a welcome packet from Further with additional information. You’ll receive a separate mailing from Further containing a healthcare Visa debit card that you can use to access your HSA funds to pay for eligible expenses.

Then, each year during annual enrollment, your employer will provide instructions on what to do to change or continue your election.

If you already have an HSA with another administrator, you may transfer your existing HSA balance to Further to consolidate your savings. Check with you current HSA administrator to see if any fees may apply.