What is an HSA and how does it work?

Health Savings account paperwork

A health savings account (or HSA) is a special type of savings account that allows you to save pre-taxed salary dollars to use on health and medical expenses, including eye care.

You can only enroll in an HSA if you’re one of the 42% of Americans enrolled in an HSA-eligible high deductible health plan (HDHP).

Setting one up can be a smart way to lower your tax bill while making sure you’ll be able to cover the costs of any medical care you or your family may need.

What Is an HSA?

HSAs were established in 2003 as part of the Medicare Prescription Drug, Improvement and Modernization Act in an effort to make health care costs more manageable for consumers and employers. 

If you have an HSA in conjunction with your HDHP, you can save money for medical expenses that fall within your deductible limits, as well as qualified medical expenses, such as vision care costs, that health insurance plans don’t cover. 

Your payroll contributions to your HSA can be deducted from your taxable income for federal income tax purposes — as well as state income tax in almost all states. Payroll deductions are also made on a pre-tax basis. Any money you withdraw from the HSA isn’t taxed as long as it’s spent on qualified medical expenses.

How does an HSA work?

You can spend your HSA money on qualified medical expenses for yourself, your spouse and your dependents. HSAs usually issue debit cards or checks that you can use to draw on your balance.

The Internal Revenue Service (IRS) has created guidelines for what constitutes a qualified medical expense. This includes insurance deductibles and copayments, fees to doctors and other medical practitioners, hospital charges and prescription drug costs. Eyeglasses, frames and contact lenses are also covered. 

All health plans are required by law to cover preventative care such as annual physical exams, routine vaccinations and well child visits. You won’t need to use your HSA to cover these expenses. You also cannot spend HSA funds on health insurance premiums.

If you withdraw money from your account to pay for non-medical expenses, you’ll owe taxes on what you withdraw, plus a significant penalty of 20 percent. 

Am I eligible for an HSA?

You must subscribe to a health insurance plan the IRS considers an HDHP to qualify for an HSA.

In 2020, the annual out-of-pocket expenses for a HDHP cannot exceed $6,900 for individuals or $13,800 for families. Additionally, you cannot have any additional non-HDHP health insurance coverage, be enrolled in Medicare or be claimed as a dependent on anyone’s tax return.

How much can I contribute?

The IRS sets HSA contribution limits each year. In 2020, you can contribute a maximum of $3,550 as an individual or $7100 for a family. Individuals who are 55 years of age or older are allowed to contribute an additional $1,000 for the year.

If you do not spend all of the money you’ve accumulated by the end of the year, your remaining HSA balance will roll over to the next year without penalty. This means HSAs can be used to grow tax-free savings year after year.

What is covered?

Beyond medical costs such as fees for doctor’s visits and medications, HSAs cover a variety of vision care costs, too. Qualified vision care, services and products include:

  • Prescription eyeglass lenses and frames

  • Prescription and non-prescription reading glasses

  • Prescription sunglasses

  • Contact lenses and accessories

  • Eye doctor visits 

  • Eye condition screenings such as for glaucoma and cataracts 

Consult with your HSA provider or human resources department for a complete list of covered medical expenses, products and services, and start spending your HSA dollars today.

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