HSAs – Spending the funds

This is page seven of a Health Savings Account Handbook guide. Start with page one to understand all of the ins and outs of Health Savings Accounts (HSAs).

Contents

• Overview
• Healthcare expenses
• Insurance or health coverage premiums
• Making smart healthcare choices
• Losing eligibility
• Summary

Overview

Under the law, when you use your Health Savings Account (HSA) for qualified medical expenses, the money you withdraw is tax-free.

This applies to expenses for yourself, your spouse (not a domestic partner), and any dependents you claim on your taxes.

Additionally, if someone would have qualified as a dependent on your taxes except for filing a joint return or earning over $4,300, you can use your HSA funds for their medical expenses too.

Even if you claim adult children or others as dependents, they can use their own HSAs for their dependents’ medical expenses.

As life goes on, your HSA may be affected by various events, like changes in eligibility, contribution limits, and allowed distributions.

Major life events such as job loss, marriage, divorce, having a baby, or becoming disabled can all impact your HSA decisions. This chapter will help you navigate these situations.

Healthcare expenses

You’re allowed to use your Health Savings Account (HSA) for a broad range of qualified medical expenses, even those that you can deduct from your individual tax return. However, if you use your HSA funds for expenses that don’t qualify, you’ll have to add that amount to your gross income and pay a 20% penalty.

But here’s an exception: If you or one of your tax dependents is over 65 years old, you can use HSA funds for non-qualified expenses without facing the penalty. However, regular income taxes will still apply.

Timing of expenses

You can only use your Health Savings Account (HSA) for expenses that occur after you’ve set up your HSA. Expenses incurred before you establish your HSA aren’t eligible for reimbursement from your HSA funds.

For more information about when your HSA is considered established, you can refer to page 5, “Opening an HSA.”

Qualified medical expenses

Qualified medical expenses that can be paid for using funds from your Health Savings Account (HSA) include:

• Costs related to the diagnosis, cure, mitigation, treatment, or prevention of disease, as well as treatments affecting any part or function of the body.
• Payments for healthcare services provided by physicians, surgeons, dentists, and other healthcare practitioners, including necessary equipment, supplies, and diagnostic devices.
• Goods and services required to alleviate or prevent a physical or mental defect or illness, excluding items or activities aimed at improving general health, such as vitamins (unless prescribed) or vacations (even if prescribed).
• Premiums for qualified long-term care insurance, COBRA premiums, and insurance premiums paid during periods of unemployment.
• Some other long-term care expenses, beyond just premiums.

Additionally, the Coronavirus Aid, Relief, and Economic Security (CARES) Act expanded the list of qualified medical expenses in 2020 to include over-the-counter medications and menstrual care products.

Out-of-pocket expenses for services not covered under your health plan

You can utilize your HSA funds to cover healthcare costs that might not be included in your health plan coverage, provided they fall within the scope of qualified medical expenses.

This encompasses various dental and vision expenses, along with less typical costs like removing lead-based paint from your residence.

It’s important to note that while you can use your HSA to pay for these expenses, they typically won’t count toward your deductible because health plans generally don’t cover such items.

Limited access

Your HSA custodian, which is the entity managing your HSA account, has the authority to impose restrictions on distributions in specific situations.

For instance, they might set a minimum distribution amount, such as not allowing withdrawals for less than $50, or impose limits on the number of distributions you can make within a given period, like per year.

If quick and easy access to your funds is important to you, it’s wise to inquire about these policies when selecting an HSA custodian.

Insurance or health coverage premiums

Generally, you cannot use your HSA to pay medical insurance or health coverage premiums, but exceptions exist.

Medicare premiums

Once you turn 65 and become eligible for Medicare, you can utilize your HSA funds to cover various Medicare-related costs. This includes paying for Medicare premiums for Parts A, B, C, and D, along with out-of-pocket expenses that Medicare doesn’t cover, and premiums for Medicare HMO plans.

However, it’s important to note that you cannot use your HSA to pay for premiums for Medicare supplement insurance, also known as Medigap.

Medigap policies, offered by private companies, are designed to help with expenses like copayments, coinsurance, and deductibles that you might still have even with Medicare coverage.

Premiums for employer-based coverage after 65

If you continue working after reaching 65 years old, you have the option to use your HSA funds to cover your portion of premiums for employer-based health coverage. However, this applies only if you’re not already paying your share of premiums through pre-tax salary deductions.

For individuals over 65 who are not employed, they can still utilize their HSA to pay for the portion of premiums required for employer-sponsored retiree healthcare coverage.

It’s important to note that this is applicable as long as the coverage is not considered a Medicare supplement policy.

Health insurance premiums while unemployed

While receiving unemployment benefits under federal or state law, including COBRA premiums, you can use funds from your HSA to cover healthcare coverage expenses.

Long-term care insurance

You can use your HSA funds to pay for premiums for qualified long-term care insurance that meets specific criteria set by federal law.

Making smart healthcare choices

Having a good understanding of your HSA-qualified health plan is important because it allows you to make informed decisions that benefit both your health and finances in the long run.

Conducting research

Take some time to research your medical condition, treatment options, and the potential risks and benefits associated with each treatment.

You can consider getting a second opinion from another healthcare provider or discussing your situation with friends or family members who may have experienced similar health issues.

Additionally, many HSA administrators and health plans offer helpful online resources and tools that provide detailed information about different treatment options.

Getting a second opinion

If your healthcare provider suggests surgery, it’s a good idea to seek a second or even a third opinion. Different professionals may offer alternative perspectives on the best treatment for your condition.

In many cases, treatment can be delayed while you explore all available options with your doctors.

Even if you haven’t met your HSA-qualified health plan’s annual deductible, it’s important to understand your plan’s requirements regarding surgery.

Some plans may require prior authorization for non-emergency surgeries, and some may even require a second opinion before granting authorization.

You can use your HSA funds to cover any out-of-pocket expenses associated with seeking a second opinion from any expert, whether they’re in-network or out-of-network.

Following the rules of your HSA-qualified health plan can help minimize waste, save money, and provide you with valuable information about your treatment options. It also allows you to use your HSA funds wisely, ensuring they’re available when you need them most.

Choosing your doctor and hospital

Just like other health plans, an HSA-qualified health plan allows you to choose between in-network and out-of-network providers. However, when facing a major medical event like surgery, it’s important to thoroughly explore your in-network options before considering out-of-network providers.

Check if your plan has separate out-of-pocket limits for in-network and out-of-network care. Using providers within your network can often save you thousands of dollars, as they typically accept deeper discounts for their services compared to out-of-network providers.

If you don’t have much money saved in your HSA yet, you may initially have to pay for medical expenses with after-tax dollars.

Many hospitals and doctors offer financing options, allowing you to use future HSA contributions to pay off these expenses or reimburse yourself if you use other funds. However, be mindful of any interest charges associated with financing, as you cannot pay interest from your HSA.

When planning for surgery, remember that it involves multiple providers besides your primary surgeon. Try to choose an anesthesiologist within your plan’s network to maximize your benefits.

Ask your doctor about the other specialists involved in your surgery and where they have operating privileges.

Contact the hospital and specialists to confirm if they are in-network. Some out-of-network providers may offer prompt-payment discounts or honor in-network pricing if requested in advance.

Taking the time to research these details can help you save money in the long run.

Obtaining authorizations and referrals

It’s crucial to understand your plan’s rules regarding authorizations and referrals. Even for in-network providers, failing to obtain required referrals and authorizations can lead to financial penalties.

These penalties won’t contribute to meeting your out-of-pocket limit for the year, and disregarding your plan’s rules can result in unnecessary costs.

Therefore, make sure to adhere to your plan’s requirements to avoid financial penalties.

Example: Negotiating discounts with an out-of-network provider

Sally’s primary care physician suggested elective gallbladder removal and referred her to a surgeon who does not practice within her health plan’s network.
 
Sally feels comfortable with this surgeon and wants to use her despite her out-of-network status.

The surgeon’s office explains that because Sally has an HSA and can pay promptly, they will offer a discount, charging her only $50 more than an in-network provider.

Sally then finds out that her out-of-network surgeon can perform surgery in both the in-network surgery center and an out-of-network hospital in her town.

Sally’s surgeon agrees to schedule Sally’s surgery at the in-network surgery center, because this will save her significant out-of-pocket expenses.

Because she makes careful, well-informed decisions, Sally pays a little extra to have the surgery performed by the doctor she chooses and saves thousands of dollars by pre-selecting the in-network surgery center.

Encountering a sudden medical crisis

It’s important to be familiar with your plan’s guidelines regarding emergency situations. Typically, you or a representative should contact your plan within 24 to 48 hours of an emergency.

However, if you’re initially taken to an out-of-network facility, you may not need to transfer hospitals until your condition stabilizes.

While emergency treatment is vital, it can also be unexpectedly costly. Therefore, aim to use in-network providers once the immediate danger has passed.

For non-emergency situations, reach out to your health plan’s urgent care line or nursing hotline before seeking care. This number is usually found on the back of your health plan card.

In urgent situations—those requiring treatment within 24 hours to prevent serious or life-threatening conditions—calling ahead ensures you’re directed to an in-network urgent care center or hospital, especially when traveling.

Many plans offer nationwide coverage, so in-network providers are often available across the country.

Under the No Surprises Act, effective January 1, 2022, patients are protected from surprise bills for emergency services at out-of-network facilities or with out-of-network providers.

Patients are only responsible for in-network cost-sharing amounts in true medical emergencies, allowing them to prioritize care without immediate financial concerns.

Losing eligibility

Even if you become ineligible to contribute to your HSA, you can still use the funds for qualified medical expenses.

Job changes

Losing your job

If you lose your job, change jobs, have reduced working hours, or your employer changes the offered health plan, you might lose eligibility to contribute to your HSA.

However, even if you lose this eligibility, you can still utilize the funds in your HSA for qualified medical expenses.

While you cannot add to the account, you still own it and can resume contributions if you obtain another HSA-qualified health plan in the future.

COBRA serves as a crucial safety net in such situations, as it allows you to maintain coverage for qualified medical expenses and ensures that your out-of-pocket medical expenses count toward your deductible.

Various job changes, such as resigning, being laid off, retiring, or getting fired (except for gross misconduct), can trigger eligibility for COBRA. Even having your work hours reduced may make you eligible for COBRA, unless your company offers health coverage for part-time employees.

If you opt for COBRA coverage, you can utilize your HSA to pay for COBRA premiums and continue contributing to it.

Additionally, it’s essential to explore options under the PPACA and associated healthcare marketplaces, as you may qualify for subsidies that significantly reduce your coverage costs. Your COBRA notice should provide resources to help you explore these options effectively.

Getting a new job

When starting a new job, some employers have a waiting period before you can enroll in health coverage. If you have an HSA-qualified health plan or COBRA continuation coverage from your previous job during this waiting period, you can still make HSA contributions.

If your new employer provides an HSA-qualified health plan, it’s worth considering transferring your old HSA to the new one.

You can do this through direct trustee-to-trustee transfers, and there’s no limit on how many transfers you can make. This ensures a smooth transition and allows you to continue managing your HSA funds seamlessly.

Company changes

Employer bankruptcy

If your company shuts down or declares bankruptcy, they may no longer offer a health plan, and COBRA coverage might not be an option.

However, if you find employment with a new company that offers health coverage, you could be eligible for COBRA benefits or a new health plan through that employer.

If you opt for COBRA, you can use your HSA to cover those premiums. Alternatively, if you enroll in an HSA-qualified plan with your new employer, you can continue contributing to your HSA.

In the event that the bankrupt company doesn’t provide COBRA coverage, you can still use your HSA funds for qualified medical expenses.

Additionally, you can use your HSA to pay for other health coverage, including premiums for insurance obtained while receiving unemployment benefits.

Branch closure

If your employer falls under COBRA regulations and your specific workplace or branch closes while the rest of the company or a parent company continues operating, you’re entitled to COBRA coverage if you lose your job and health coverage due to the closure. You can utilize your HSA to cover those COBRA premiums.

Company acquisition

If your company is acquired by another and you lose your job as a result, the acquiring company might be obligated to offer you COBRA coverage.

If you choose COBRA coverage, you can utilize your HSA to cover the premiums.

Change of insurance plan

If your employer discontinues offering an HSA-qualified health plan, it doesn’t automatically trigger COBRA eligibility.

You may lose the ability to contribute to your HSA, but you can still utilize the funds for qualified medical expenses. If you decide to enroll in another HSA-qualified plan, you can continue contributing to your HSA.

However, if you opt for a health plan that doesn’t meet the qualifications for HSA ownership, you won’t be able to contribute to your HSA anymore.

Other changes

Retiring before you’re eligible for Medicare

If you retire before reaching the age of 65, your HSA remains a valuable resource for covering various qualified medical expenses.

You can use it to pay for COBRA premiums, long-term care insurance premiums, or premiums for individual coverage you might purchase, especially if you’re receiving unemployment compensation. Additionally, your HSA funds can directly cover qualified medical expenses.

However, if you retire from one job, start receiving a pension, and then begin working for another employer, you cannot use your HSA to pay for any premiums required by your new employer, unless you’re at least 65 years old.

Once you reach the age of 65, you gain more flexibility in using your HSA funds, including using them for deductible health insurance expenses, excluding Medicare Supplement or Medigap coverage.

It’s important to note that while Medicare recipients have access to various coverage options, premiums for Medigap insurance or Medicare Supplement coverage are not considered qualified expenses under the HSA guidelines.

Therefore, you cannot use your HSA funds to pay for such premiums. Retiree health insurance provided by employers typically differs from Medigap policies and may obviate the need for additional coverage.

Medicare enrollment

Once you enroll in Medicare, your eligibility to contribute to an HSA ceases.

This includes instances where you enroll in Social Security Income (SSI) or begin receiving Social Security benefits, as these actions automatically enroll you in Medicare Part A, rendering you ineligible for further HSA contributions.

Similar to early retirees, you can utilize your HSA funds to cover various expenses after enrolling in Medicare.

This includes paying for COBRA premiums, premiums for long-term care insurance, or premiums for individual coverage if you’re receiving unemployment compensation. Additionally, your HSA balance can be directly applied to qualified medical expenses.

If you continue working beyond the age of 65 and your employer offers healthcare coverage, you can use your HSA funds to cover your share of premiums, if any, especially if these premiums are not fully covered by pre-tax salary reductions.

Moreover, if your employer extends healthcare coverage to retirees or their survivors, requiring a premium contribution, your HSA can be used to pay for this coverage as well.

Once you reach the age of 65, you can also use your HSA funds to pay for Medicare premiums, further enhancing the flexibility and utility of your HSA.

Personal bankruptcy

HSAs, governed by laws concerning savings accounts, typically lack protection from creditors in the event of personal bankruptcy. In such cases, creditors may seize funds from the HSA to satisfy outstanding debts.

Consequently, the account holder would be liable for income tax and a 20% penalty on any amount used for nonqualified distributions.

However, there is a provision under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) that allows an individual debtor to deduct reasonably necessary health insurance, disability insurance, and HSA expenses for themselves, their spouse, or dependents when determining their monthly income statement.

This provision provides some level of protection for essential healthcare expenses during bankruptcy proceedings.

HSA as collateral

Owners, beneficiaries, trustees, and custodians of Health Savings Accounts (HSAs) are prohibited from engaging in certain transactions deemed as prohibited by the IRS. These include:

1. Sale, exchange, or lease of property.
2. Borrowing or lending money.
3. Furnishing goods, services, or facilities.
4. Transferring to or using any assets contained in the account for the benefit of the beneficiary.

Furthermore, IRS regulations strictly forbid pledging any portion of the HSA as security for a personal loan, whether for the account holder or another individual.

If such a pledge occurs, any distribution from the HSA is treated as gross income, assumed to be used for non-medical expenses, and thus subjected to income tax along with a 20% excise tax penalty.

Disability

If you continue coverage under your employer’s plan or another HSA-qualified health plan after becoming disabled, you can still make contributions to your Health Savings Account (HSA).

However, if you lose your employer-sponsored HSA-qualified coverage due to disability and cannot work, you may become ineligible to contribute to an HSA unless you qualify for COBRA coverage or obtain HSA-qualifying health plan coverage as an individual.

In such cases, you can use your HSA balance to make COBRA payments if you become eligible for COBRA coverage.

It’s important to note that if you must take a distribution from your HSA for non-medical expenses due to disability, you will still pay income tax on the distribution, but you will not be subject to the excise tax.

Social Security Disability Insurance

If you’re approved for Social Security Disability Insurance (SSDI) benefits, there are some important changes to consider. First off, getting SSDI benefits is different from any disability benefits you might get from work.
To qualify for SSDI, the Social Security Administration looks at a few things:

• They check if you can’t work or do any major job activities because of a health issue, for at least five months before you apply.
• They see if you can’t do the work you used to do, or if you can’t switch to another kind of work because of your health condition.
• And they make sure your health problem has lasted or is expected to last for at least a year, or could lead to death.
  If you start getting SSDI benefits, you’ll be able to sign up for Medicare two years later. But here’s the catch: once you’re on Medicare, you can’t keep putting money into your Health Savings Account (HSA) anymore.

But don’t worry, you can still use the money in your HSA while you’re applying for SSDI and even after you start getting benefits.

Before you start getting SSDI payments, you can also use your HSA to pay for COBRA insurance if you’re eligible, and you can keep making contributions to your HSA if you have the right kind of health coverage and no other disqualifying insurance.

Plus, you can always use your HSA money for other medical expenses.

Death

When the owner of an HSA passes away, any money left in the account goes to the person or entity named as the beneficiary. If the owner selects their spouse as the beneficiary, the HSA becomes their spouse’s HSA after they pass away.

Since an HSA is an individual account, the surviving spouse who inherits the HSA becomes the new owner. They can then use the HSA just like any other owner would. However, they must pay income tax on any money not used for qualified medical expenses.

If the HSA goes to someone other than the surviving spouse, the funds lose their tax benefits. The person or people inheriting the HSA need to report the fair market value of the HSA as income on their tax returns.

They can reduce this value by any payments made from the HSA for the deceased within a year of their death.

It’s important to choose a beneficiary when you open your HSA because what happens to your HSA after you pass away depends on who you name as the beneficiary. If you name your estate as the beneficiary, the value of your HSA will be included in your final income tax return.

Summary

1. Know Your Expenses: Understand what qualifies as a medical expense according to IRS regulations. You can find detailed information in Title 26 Internal Revenue Code §213(d) and §223(2)(A). Publications like IRS Publication 502 and Publication 969 offer valuable guidance and are updated annually.
2. Premium Payments: Typically, you can’t use your HSA to pay for insurance premiums, but there are exceptions. For example, you can use it to pay for Medicare premiums, except for Medicare Supplement or Medigap premiums.
3. Surgery Planning: Research your options thoroughly before undergoing surgery to avoid unexpected bills. Understanding your insurance coverage and potential out-of-pocket costs can help you plan better.
4. Adaptability with Employment Changes: HSAs can be useful during transitions in your career, whether you’re changing jobs, retiring, or experiencing other employment changes.
5. Impact of Medicare: Once you enroll in Medicare, you can no longer contribute to your HSA. However, you can still use the funds for qualified medical expenses, including certain insurance premiums.

By staying informed about these aspects of your HSA, you can effectively manage your healthcare expenses and make the most of your savings.

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