You asked and we listened! In this blog, we break down the most commonly asked HSA (Health Savings Account) questions. HSAs are a valuable tax savings vehicle — but they are complicated! Whether you have been optimizing your health expenses through HSA spending, or are just looking to get started, this blog will provide you with the most important answers to your burning questions!
Is it possible to have both a PPO and HSA at the same time?
Yes! This is possible since PPO (Preferred Provider Organization) is a type of insurance plan, as opposed to an HSA which is a Health Savings Account.
A PPO is a type of health plan that contracts with medical providers, such as hospitals and doctors, to create a network of participating providers. Simply put, you pay less if you utilize providers that belong to the plan’s network. Note: You can still use doctors, hospitals, and providers outside of your network for an additional cost.
HSAs are only available through High Deductible Health Plans and provide a triple tax-advantaged way to save for current and future medical expenses. The triple tax advantage of an HSA includes the exemption of federal, state, and payroll taxes, making it one of the most powerful savings tools from a tax standpoint!
Can I contribute to both an HSA and FSA?
Yes, you can contribute to an HSA and FSA if your employer allows it, and if your FSA is limited purpose. A Limited Purpose FSA (LPFSA) can cover dental, vision, and other eligible expenses but not medical or prescription drugs
A Dependent Care FSA is a common LPFSA. This pre-tax benefit account can be used to pay for eligible dependent care services, such as preschool, summer day camp, before or after-school programs, and child or adult daycare.
Should I max out my IRA or HSA every year?
From a tax standpoint, you should start by maxing your HSA every year due to HSA exemption from payroll taxes. From an employee standpoint, this grants you an extra 7.65% in tax savings per year.
The drawback of an HSA is if funds are not used for qualified medical expenses, you will be subject to a 20% penalty by the IRS. On the other hand, pre-retirement withdrawals from your IRA are only subject to a 10% penalty.
For an IRA, premature withdrawal penalties go away if you are 59.5 years old, whereas with an HSA, premature withdrawal penalties go away when you are 65 years old. It is important to understand the drawbacks of an HSA: If you need to access funds from your Health Savings Account for non-medical reasons before you are 65, you are going to pay a 20% penalty on the amount withdrawn.
What happens to money in an HSA if not used?
Unlike an FSA, funds deposited into your HSA never go away; they are yours until you use them. The main thing to be aware of is that some custodians will charge a monthly or quarterly fee to have your money in their HSA. This fee is usually small, but in theory, these fees can eat away your account balance over time.
Pro Tip: As you evaluate HSA custodians, make sure to check/document their various fees for cash accounts AND investment accounts (you can invest HSA monies!)
Does an HSA rollover count toward the IRS annual limit?
Absolutely not! Rollovers do not impact your annual contribution amount. Your contribution amount is determined on a year-by-year basis, and any rollovers have already been restricted by previous yearly contribution limits — so any rollover is considered a consolidation vehicle vs. a new contribution to your HSA.
You Should Know: The only way a rollover would impact your current year contribution limit would be if you have made contributions to the HSA you are transferring, within the same calendar year. This is due to the IRS annual limit running on an aggregate basis.
What happens if I use my HSA for non-medical expenses?
Prior to age 65, you are subjected to a 20% premature withdrawal penalty on monies used for non-medical expenses, in addition to normal income taxes.
Example: If you are 48 years old and take out $10,000 from an HSA, for non-medical expenses, you would be subject to federal and state income tax on that $10,000 withdrawal, and then you would also be subjected to a 20% penalty. Under this example, you would be penalized $2,000 on a $10,000 withdrawal from your HSA in addition to federal and state income taxes.
How are HSAs beneficial from an employee perspective?
HSA plans are beneficial to employees because they give them the power to tax-efficiently save for their health expenses. If an employee is under a normal co-pay plan, then they are paying a much higher premium to have access to healthcare, and they still pay a co-pay for the care. With an HSA-eligible health plan, you are basically paying the minimum to have access to care. And then you pay only when you access that care. So, you’re only paying for what you need.
Can I use an HSA to reduce taxable income if I am self-employed?
Absolutely! If you have a health insurance plan that is HSA eligible, meaning that it meets the IRS requirements for a high deductible plan, then you can use an HSA to reduce taxable income.
HSAs are only available through High Deductible Health Plans and provide a triple tax-advantaged way to save for current and future medical expenses. The triple tax advantage of an HSA includes the exemption of federal, state, and payroll taxes.
More Questions About HSA?
If you still have questions specific to your HSA, or other ways to optimize your taxes, schedule a one-on-one discovery meeting to review the specifics of your individual situation.
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