As employers search for ways to lower their health care costs, they're encouraging employees to sign up for a high-deductible health insurance policy paired with a health savings account. An HSA gives you a triple tax break: Your contributions are sheltered from income taxes, the money grows tax-deferred, and the funds can be withdrawn tax-free for medical expenses. It's like a supercharged flexible spending account that never expires, and it can even serve as an extra retirement-savings fund. Most employers also add a few hundred dollars to the accounts each year as a bonus. Below we answer your questions about how HSAs work and how to make the most of them.
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How do I know if I can make HSA contributions? If your policy has a deductible of at least $1,300 for individual coverage and $2,600 for family coverage in 2016 and 2017, you may be eligible to contribute to an HSA. But not all high-deductible policies are HSA-eligible. The policy must also make everything subject to the same deductible (other than preventive care, which must be covered by all health plans without any deductible or cost-sharing). Some plans, for example, aren't eligible because they have a separate deductible for prescription drugs. Ask your insurer or employer if the plan is HSA-eligible; plans aren't always clearly marked, especially on the state exchanges.
How much can I contribute to an HSA? You can contribute up to $3,350 if you have self-only coverage in 2016, and $6,750 for family coverage. For 2017, you can contribute up to $3,400 for self-only coverage and $6,750 for family coverage. In both years, you can also make a $1,000 catch-up contribution if you're 55 or older anytime during the year. Your contributions are pretax if made through your employer or tax-deductible if you're on your own, and you can use the money tax-free for medical expenses in any year.
You still have until April 18, 2017, to make HSA contributions for 2016. If you had an HSA-eligible policy for the full year, then you can contribute up to $3,350 for individual coverage or $6,750 for family coverage (plus $1,000 if you were 55 or older in 2016). If you had an HSA-eligible policy for only the first few months of the year, your contribution limit is based on the number of months you had the policy. But if you had the policy on December 1, 2016, you can make the full year's contribution even if you didn't have the policy for the full year. However, in that situation, you must keep an HSA-eligible policy for all of 2017 in order to avoid a penalty.
Where can I open a health savings account? What should I look for in an HSA administrator? Many banks and brokerage firms offer health savings accounts, and you can open an account anywhere as long as you have an HSA-eligible health insurance policy. Most employers and insurers have relationships with specific HSA administrators, but you aren't required to use their plan. However, there are benefits to sticking with the plan they offer--it may streamline the claims-paying process, and it could be the only way to get an employer contribution. For example, employers offering Fidelity HSAs contribute an average of $860 a year to employees' accounts; you could get even more if you participate in a wellness program.
You can search for HSA administrators using the HSASearch.com tool from consulting firm Devenir. Look for a plan with low fees and investment choices that match the way you plan to use the HSA. If you expect to use the money for current medical expenses, look for an HSA with a low-cost savings account and a debit card that makes it easy to tap the money.
But you'll get the biggest tax benefit if you keep the money growing in the HSA for the long term and use other cash for current bills. In that case, look for an account that offers mutual funds or other long-term investment options. HSA Bank, for example, lets you invest in mutual funds, stocks, exchange-traded funds and other investments through a TD Ameritrade brokerage account. Health Savings Administrators offers 22 Vanguard funds, and several fund choices from TIAA, T. Rowe Price, Dimensional and MFS. Compare fees, and see if you can avoid any changes by maintaining a minimum balance.
If you choose to switch to a different HSA administrator, you can transfer the money; it's similar to an IRA rollover.
What can I pay for with HSA money? Is there a time limit for using it? You can use the money tax-free for out-of-pocket medical expenses, such as your deductible, co-payments for medical care and prescription drugs, or bills not covered by insurance, such as vision and dental care.
There's no time limit for using the money, and you can even use it tax-free for many medical expenses in retirement. You can reimburse yourself for the money that Social Security withholds from your benefits to pay Medicare Part B, and you can also make tax-free HSA withdrawals to pay Medicare Part D and Medicare Advantage premiums (but not medigap premiums). You may also make tax-free withdrawals to cover a portion of long-term-care premiums based on your age ($4,090 per year if age 61 to 70, and $5,110 if older than 70 in 2017).
Can I contribute to an HSA after age 65? You can withdraw the HSA money tax-free for medical expenses at any age, but you can no longer contribute to an HSA after you sign up for Medicare.
You may be able to delay signing up for Medicare Part A and Part B if you're still working at age 65, which makes sense for some people if their employer contributes to their HSA. However, you may not be able to delay Medicare enrollment if you work for an employer with fewer than 20 employees or if you sign up for Social Security and are automatically enrolled in Medicare.
What happens if I want to use the money for non-medical expenses?
If you use the money for non-medical expenses before age 65, you'll have to pay a 20% penalty plus taxes on the withdrawals. The penalty goes away after age 65, but you'll still have to pay taxes if the withdrawals aren't for eligible medical expenses.
It's much better to use the money for health care and avoid the taxes. Fidelity estimates that a 65-year-old couple retiring in 2016 will need $260,000 for health care costs in retirement, in addition to expenses covered by Medicare. The HSA can be a great source of tax-free money to pay those bills.
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There's no deadline for making eligible withdrawals. If you used cash for medical bills after opening the account and let the money grow in your HSA, you can withdraw money tax-free for those bills at any time as long as you've kept the receipts. Many insurers make it easy to keep records of past expenses. For example, Cigna's expense tracker lets you upload your medical receipts and mark whether you paid the bill from your HSA or other sources.