Most people know the triple tax savings HSAs offer, including tax-free contributions, tax-free earnings, and tax-free withdrawals for qualified healthcare expenses. However, while HSAs primarily help reduce healthcare costs, they also have lesser-known values. So, what are the hidden benefits of an HSA?
HSA Portability
When you have an HSA, you keep and use those funds for the life of the account, regardless of your coverage or employment status. The funds in your account can be used at any time to pay for qualified health expenses. They can also serve as retirement savings.
This portability differs significantly from Flexible Spending Accounts (FSAs) or Health Reimbursement Arrangements (HRAs). Upon job termination for any reason, those funds return to the employer, even if accumulated through employee contributions.
HDHP Status
HSA eligibility is contingent upon high-deductible health plan (HDHP) enrollment. Should that change and the account owner is no longer enrolled in a qualified HDHP, account funds can still be used to pay for eligible expenses for the owner and their dependents. However, the ability to contribute new funds will be suspended until the owner enrolls in another HDHP.
Anytime Reimbursement
With no time limitations, HSA owners can submit a reimbursement claim anytime after establishing the account. This provision is essential because HSA owners can only spend the current balance in the account, unlike being able to “spend ahead” as with FSA accounts.
Consider this example. You open an HSA on January 1, 2023, and start making contributions. A few weeks later, you receive a couple of dental implants that cost more than you expect to have in your account until sometime in 2024. You can go ahead and file for a reimbursement distribution now, or wait until next year, or the year after, or anytime in the future.
Here’s another example using the same HSA that you opened on January 1, 2023. A few weeks before opening the account, you wound up in the ER after breaking your forearm in a fall. Since the expense was incurred BEFORE the account was opened, it is not eligible for reimbursement (now or ever).
Some HSA owners pay eligible expenses out-of-pocket for years and save their receipts to file later. For those who can afford that option, the HSA grows faster by deferring the distributions, stretching the tax benefits.
Funding Options
Anyone can contribute to an HSA account, including the owner, a spouse, an employer, a parent, or anyone else, as long as the account owner is enrolled in a qualified HDHP.
Other funding options include making a one-time transfer from an existing IRA retirement account. Or, you can consolidate multiple HRAs by rolling over the balance of each into one account.
Finally, you can start or end, increase or decrease the amount of your HSA contribution at any time during the year and for any reason. This is unlike FSAs, where you have to have a qualifying change of status to make a change mid-year.
Contribution Catch-Up Provision
The IRS sets annual contribution limits based on your HDHP coverage level (self-only or family). Once account owners reach age 55, they can also make ‘catch-up’ contributions of up to $1,000 each year above the standard annual limit for their coverage level. The extra contribution can help defray increasing medical costs or build up the account balance to supplement retirement savings.
Zero tax penalties after age 65
Once the HSA account owner has reached the age of 65, distributions (withdrawals) for eligible healthcare expenses remain tax-free and distributions for any other reason are taxed at the person’s current income tax rate. Prior to the age of 65, non-eligible distributions incur a penalty of 20% on top of being taxed at the person’s current income tax rate.
We hope this list has answered your questions about the hidden benefits of an HSA account that can help account owners make the most of their tax-advantaged benefit accounts. Contact your benefits administrator for more information on the benefits of an HSA.
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