This is page five 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
- Select a custodian
- Open an HSA
- Making contributions to your HSA
- Paying for others’ expenses
- Summary
Overview
To start a Health Savings Account (HSA), you need to have an HSA-qualified health plan starting from the first day of the month when you want to begin putting money into the HSA.
Once your account is officially opened, you can start using the money in it for medical expenses that qualify. The rules about when you can take money out of your HSA for medical costs are controlled by state laws.
Select a custodian
You can’t just stash your HSA contributions anywhere like in a shoebox or regular bank account. You need to use an account specifically set up as an HSA.
The role of custodian
The HSA trustee or custodian is the one who holds your money, keeps track of what you put in and take out, and handles tax paperwork for you at the end of the year.
Usually, an insurance company or a bank can be your HSA trustee or custodian, or any entity approved by the IRS for handling individual retirement accounts (IRAs). Other entities can also apply for approval to become an HSA trustee or custodian as per IRS rules.
Not all companies offering HSAs provide the same level of service or support, so it’s important to research the quality of their products, services, and any fees they might charge before you choose a custodian.
For more details about trusts, trustees, and custodians, you can check out the “Trusts and HSAs” section in Page 3, “Health Savings Accounts.”
Questions to ask
You have options when it comes to setting up your HSA. You can do it yourself, or your employer can help by sending contributions to a specific HSA custodian
It’s not necessary for the company handling your HSA-qualified health plan to also manage your HSA. You might like the way a different HSA custodian handles things better, especially when it comes to services, terms, and investment choices.
Before you make a decision, make sure you know what to expect in terms of managing your HSA. Take a close look at things like fees, how much money you could earn through investments, and how the account will be taken care of.
Here are some questions to consider before selecting a custodian:
Contributions and managing your account
- How much can I contribute and how often?
- What are the contribution limits and frequency?
- What methods are available for making contributions?
- How often will I receive statements, and how will they be delivered (electronically or by mail)?
- Can I adjust my contributions, and if so, how frequently?
- Will I receive a debit card with the account?
- When can I expect to receive my debit card and other account materials?
- What should I do if I need to access funds before receiving my debit card?
- How should I organize and save receipts for tax purposes or potential disputes?
- Am I allowed to invest funds, and are there any restrictions on investments?
Fees
Before selecting a custodian for your HSA, it’s important to understand the fees involved. The Department of Labor (DOL) requires that HSA custodians provide timely and comprehensive information about any applicable fees. Here are some questions to ask:
Fee structure:
- How does the custodian determine fees?
- What fees are charged for managing accounts, record-keeping, and sending forms/statements?
- Are fees based on the account balance, monthly contributions, or a fixed amount?
- Does the custodian waive fees if my account balance reaches a certain level?
- What specific fees are assessed, such as for account maintenance, check replacement, stop-payment, rollover, or account closure?
Fees for managing your HSA could cover things like keeping your account up and running, getting new checks if yours are lost or stolen, stopping payments if there’s a problem with a charge, moving money from one HSA to another, and closing your account.
- Who is responsible for paying the fees?
- If I open the account through my employer, do they cover the fees, or am I responsible?
- Can I pay fees directly, or are they deducted from my account?
- Do fees affect the amount available for spending from my account?
Earnings on your account
HSA custodians provide different types of accounts. Some offer federally insured ones, protected by organizations like the FDIC or NCUA, which earn a modest interest rate and guarantee your initial money. Others offer mutual funds, which invest in things like stocks and bonds. However, these funds come with market risks, meaning their value can go up or down. Unlike insured accounts, mutual funds don’t guarantee your initial investment.
- What rate of return can I expect? (This includes interest rate for insured accounts and potential gains for mutual funds.)
- Is the account federally insured? (This applies to insured accounts only.)
- How can I start investing?
- Do I need a certain amount of money to start investing?
- Are there any fees for investing?
- Is there a minimum amount I need to invest?
Account management by trustee or custodian
- Can I take out a certain amount of money from my HSA within a specific timeframe?
- Can I transfer money from another eligible account into my HSA with this custodian?
Trustees and custodians can choose to accept rollovers and transfers, but they are not obligated to do so by law.
- How easy is it to transfer money from an investment account back to the HSA in case of a big medical expense?
- Will there be a waiting period?
- Are there any additional fees?
- Does the trustee or custodian offer a wide variety of investments and options that fit what I need?
Additional services
Healthcare costs can often be puzzling or unclear. As someone with an HSA, it’s important to understand how to figure out the real costs so you can make smart choices and get the most out of your investment.
Certain HSA providers offer tools and services to help you make informed decisions. Look for an HSA provider that offers valuable assistance in researching healthcare expenses, enabling you to save money and make wise decisions about how to use your healthcare funds.
- Will I get access to useful tools to compare costs from my employer, health plan, or HSA custodian?
- Will the trustee or custodian assist me over the phone or online to review and cut down my healthcare spending?
- Will I have access to phone support? When will it be available? What if I have an emergency late at night?
- Does the trustee or custodian offer mobile access? If yes, what services are available through the mobile app?
- Does my custodian offer easy-to-use investment options and advice to potentially increase my HSA balance?
- Will my custodian charge me for investing my HSA funds?
Other considerations
Different HSA custodians provide different investment choices and perks and have their own fee structures. When selecting an HSA custodian, consider the following:
Investment advice
Automated advice, also known as “robo-advice,” utilizes computer algorithms to manage investments without the need for a human financial adviser. These algorithms are controlled by software and handle account management independently. If your HSA custodian offers automated advice, inquire about the cost of this service and how effectively it impacts investment returns.
- Does the HSA provider offer investment advice, including automated advice?
Fees
Provider fees can differ significantly, so it’s important to understand the fee structure before selecting an HSA custodian. Lower fees mean you’ll retain more of your earnings, while higher fees could substantially reduce your earnings over time. When assessing the overall cost of investing with a particular provider, consider the underlying fees that funds typically entail.
- What are the investment-related fees charged by the HSA custodian?
Example: Save vs. invest Nadal has an HSA-qualified family health plan and, after medical expenses, makes a net contribution of $3,000 each year to his HSA. If Nadal saves the same amount every year for 30 years but doesn’t invest those dollars, he will accumulate $90,000 over a 30-year period, assuming he does not receive significant interest on his cash balance. However, if Nadal invests the net contribution of $3,000 each year (after meeting the minimum investment threshold) in a diversified investment portfolio, continually invests the balance and achieves a 7% annualized rate of return, his savings could grow to about $306,000—this is, $216,000 more than the actual amount he invested. Note that individual results may vary.
Open an HSA
You can start your HSA at any point in the year as long as you have an HSA-qualified health plan. Many individuals begin their HSA or decide on contribution amounts during their employer’s open enrollment period. Once you’re eligible to open an HSA, you can maintain it, but to keep contributing, you must remain enrolled in an HSA-qualified health plan and not have any other disqualifying coverage.
Enrollment
If you receive health coverage through your employer, you’ll likely enroll in your HSA through your employee benefits or HR website. If you’re opening an HSA on your own, the HSA provider you choose might offer an online enrollment process.
For HSAs at banks, you can enroll in person or online through the bank’s website. If you’re working with an insurance broker, they will provide forms or online resources to assist you in enrolling in an HSA.
Custodial agreements
Your HSA custodian will typically ask you to sign a trust agreement (IRS Form 5305-B) or a custodial agreement (IRS Form 5305-C). If you’re enrolling in an HSA online, you might not need to sign a physical form, as the process could be completed electronically.
Customer Identification Program (CIP)
Under the USA PATRIOT Act, when opening a financial account like an HSA, individuals need to go through a verification process. This process involves providing details such as your name, date of birth, Social Security Number (SSN), and address.
Beneficiaries
When you open an HSA, it’s important to choose a beneficiary. If you select your spouse as the beneficiary, the ownership of the HSA automatically transfers to them if you pass away, maintaining its tax-advantaged status.
However, if you name someone else as the beneficiary, the fair market value of the HSA becomes part of your estate and is subject to taxation as income for the beneficiary when distributed.
Payment methods
Typically, after you receive medical treatment, your healthcare provider will send the bill to your health plan for payment of eligible expenses. You can then choose whether to use your HSA funds to cover your portion of the bill. Your HSA custodian and health plan can offer assistance if you have any questions about the process.
In some cases, healthcare providers may ask you to pay upfront for services rendered. If you visit a network provider, they may bill your insurance company first and then send you an adjusted bill for any remaining balance.
Many HSA custodians provide tools like debit cards or checkbooks that you can use to pay for qualified medical expenses directly from your HSA.
Making contributions to your HSA
The IRS has clear rules about who can open and add money to an HSA. Once you open one, it stays yours, even if you switch to a different health plan. However, you can only put more money into it if you’re still eligible according to IRS rules.
Definition of an eligible individual
According to the law, to be eligible for an HSA, you must:
- Have coverage under an HSA-qualified health plan at the beginning of any month you claim eligibility.
- Not be covered under any other health plan that would disqualify you from having an HSA, except for some specific types of coverage and certain health-related payment plans explained earlier.
- Not be enrolled in Medicare.
- Not be claimed as a dependent on someone else’s tax return.
Healthcare reform and young adult children
Under the Patient Protection and Affordable Care Act (PPACA), adult children up to the age of 26 can be covered by their parents’ HSA-qualified health plan. However, their medical expenses cannot be paid from their parents’ HSA.
You may choose to cover your adult child until they turn 26, regardless of whether they get married, have a baby, attend school, live with you, or qualify for health coverage through their job.
If your adult child supports themselves or does not qualify as a tax dependent, you cannot pay for their healthcare expenses with your HSA. However, single adult children who do not qualify as tax dependents and are covered under a parent’s family HSA-qualified health plan can open their own HSAs and contribute up to the annual family maximum.
Anyone can contribute to the adult child’s HSA, including their parents, as long as the contribution does not exceed the legal annual limit.
Parents of adult children may contribute the family maximum to their own HSA and also contribute the family maximum to their adult children’s HSAs.
The maximum family contribution limit does not need to be split between parents and children, as it would with a spouse. If you give your adult child an HSA, you do not get to deduct the contribution, but your child receives the contribution tax-free.
Employed individuals
Employers usually cover a part of the premiums for employee health plans. If an employer offers an HSA-qualified health plan, they might also contribute to an HSA because these plans generally have lower premiums compared to other health plans. However, even if the employer contributes, the employee owns all the funds in the HSA.
Employers might have specific criteria for employees to join any health plan they offer, like a minimum length of employment or working hours. It’s essential to understand your employer’s eligibility requirements to avoid any confusion.
Self-employed individuals
Even if you’re self-employed or a 2-percent shareholder-employee in an S corporation, you can still open an HSA and make contributions if you meet the IRS eligibility criteria.
However, as a self-employed individual or a 2-percent shareholder-employee in an S corporation, you’re not classified as an employee, so you can’t contribute to an HSA through the cafeteria plan under IRC §125. Instead, you can make HSA contributions and deduct them on your taxes.
Retired and disabled individuals
If you’re eligible but haven’t enrolled in Medicare yet, you can still contribute to an HSA until the month you sign up for Medicare. Additionally, you can make catch-up contributions before enrolling in Medicare.
Regardless of your age, you can establish and contribute to an HSA if you have an HSA-qualified health plan but aren’t enrolled in Medicare.
Even if you have access to a retiree HRA that only reimburses expenses after retirement, you can still set up an HSA as long as you don’t have Medicare coverage and aren’t receiving benefits from the retiree HRA.
If you have an HSA-qualified health plan and an HSA, and you qualify for short-term or long-term disability benefits under an employer-sponsored plan, you should remain eligible if your basic healthcare coverage stays intact during the disability period.
However, if you start receiving Social Security disability benefits and your Medicare coverage begins, you may lose eligibility to contribute to your HSA.
Paying for others’ expenses
According to the law, you can use funds from your HSA to cover qualified medical expenses for yourself, your spouse, any dependents you claim on your taxes, and a few other individuals outlined below.
You and your spouse
You’re allowed to use funds from your HSA to cover your spouse’s qualified medical expenses, regardless of whether your spouse has their own HSA-qualified health plan.
Even if both spouses have separate HSAs, one spouse can still use their HSA to pay for the other’s qualified medical expenses.
Additionally, you can use HSA funds to cover the qualified medical expenses of same-sex spouses. However, you cannot use HSA funds for domestic partners unless they qualify as dependents for tax purposes.
Example: Paying expenses for spouse not covered by an HSA Jon has a traditional plan that does not meet the criteria for an HSA-qualified health plan (because his plan has only a $500 deductible) and does not cover Dave, his husband. Dave elects an HSA-qualified health plan and HSA for himself. Even though Sean’s HSA-qualified health plan does not cover Jon, Dave can use his HSA to pay Jon's copayments.
Your dependents
Who “is” a dependent for family coverage?
According to IRS rules, a person claimed as a dependent for income tax purposes must have a specific relationship to the taxpayer.
This relationship can include being a child (including legally adopted or foster children), grandchildren, or great-grandchildren, among others.
It can also include stepchildren or their descendants, siblings, half-siblings, and step-siblings, along with various other relatives such as parents, grandparents, and in-laws.
However, tax dependents must also meet additional requirements that are not listed here, and these requirements may differ from those considered for health plan purposes.
Whose medical expenses can you pay from your HSA?
According to IRS Publication 969, you can use your HSA funds to cover the qualified medical expenses of your spouse and anyone you claim as a dependent on your tax return, such as a qualifying child or relative.
Additionally, you can use your HSA to cover the medical expenses of certain individuals who almost meet the criteria for being a tax dependent but fall short for specific reasons.
For example, if a relative has a gross income exceeding the IRS-determined limit or if a child or relative files a joint tax return, they may still be eligible for coverage from your HSA.
Furthermore, your dependents, even if they cannot claim their own dependents as tax dependents, can use their HSAs to pay for their dependents’ qualified medical expenses.
This includes adult children who may not be able to claim their own children as tax dependents because you, as the parent, claim them as dependents for tax purposes.
Please note that the examples provided here are for illustration purposes and should not be considered tax or legal advice. It’s essential to consult with tax or legal professionals regarding your specific situation.
Example : Married child covered by parents’ HSA Your 20-year-old daughter, Christine, and her husband, Tom, live with you. You provide more than half of her support. Even though they file jointly and earn more than $4,300, you may be able to pay her qualified medical expenses out of your HSA.
In most cases, your health plan may cover more individuals than your HSA can. For instance, your health plan might allow you to include your adult children in your family coverage until they reach 26 years old.
However, you can only use your HSA funds to pay for their medical expenses if they qualify as dependents for tax purposes, typically under 19 years old or under 24 if they are full-time students.
Similarly, your HSA may cover the medical expenses of a wider range of individuals than those you can claim as tax dependents. For example, you can use your HSA to pay for the medical expenses of a married adult child who files a joint tax return if they are younger than 19 years old or if they are full-time students younger than 24.
In summary, your HSA funds generally cover the medical expenses of your spouse and tax dependents, with a few potential exceptions.
Summary
To open an HSA, you must first have an HSA-qualified health plan and no other disqualifying coverage. This plan must meet certain government-mandated deductible and out-of-pocket maximum requirements, which can change each year.
You can choose from different types of custodians, like insurance companies or banks, to manage your HSA. These custodians handle contributions, distributions, and provide necessary paperwork for taxes.
To initiate your HSA, ensure you’re covered by an HSA-qualified health plan by the first day of the month you wish to open your account. You can contribute up to set limits based on your coverage level, which are adjusted annually.
It’s important to name a beneficiary for your HSA to avoid confusion and unnecessary taxes for your heirs if you pass away.
You can use your HSA funds to pay for qualified medical expenses for any dependents you claim on your taxes, even if your health plan covers dependents you can’t claim for tax purposes, such as children between 19 and 26 years old or dependents you don’t financially support.
While you can’t use your HSA to cover the expenses of adult children who aren’t your tax dependents, they may open their own HSA if they’re covered by an HSA-qualified health plan, whether it’s their own or yours.