Health Savings Account: FAQ

5. What do you mean by a “self-directed” HSA?

Funds in a self-directed HSA can be invested in the same manner as other self-directed retirement accounts – meaning you’re not limited to stocks, bonds, and mutual funds. Returns on the investments are added to the account and accumulate tax-free.

Returns are not considered contributions and don’t count toward the contribution limits.

6. What happens when funds are withdrawn from the account?

Funds can be withdrawn, tax-free, from an HSA at any time as long as they are used to pay qualified medical expenses. If used for any purpose other than qualified medical expenses, those funds are subject to a 10-percent penalty and are taxed at ordinary income tax rates for account holders under the age of 65.

If you are over the age of 65, funds withdrawn and used for purposes other than qualified medical expenses are taxed at ordinary income tax rates, but aren’t subject to the 10-percent penalty.

7. What costs are considered qualified medical expenses?

The IRS defines qualified medical expenses as medicine, doctor’s visits, diagnostic and treatment services, long-term care and some health care insurance premiums. See examples of covered expenses here. For additional information, please see IRS Publication 502.

8. Whose responsibility is it to ensure that HSA distributions are actually used to pay qualified medical expenses?

It’s your sole responsibility as the account holder. It’s not the obligation of the account custodian.

9. Are the distributions reported to anyone?

Yes, the distributions are reported annually to the IRS by the account custodian using forms 1099-SA and 5498-SA. The custodian is not responsible for reporting how the funds were spent. That’s the obligation of the account holder. With that in mind, you should keep good records and retain all receipts and statements. You must file Form 8889 and file it with your Form 1040 if you (or your spouse, if married filing a joint return) had any activity in your HSA during the year. You must file the form even if only your employer or your spouse’s employer made contributions to the HSA.

10. Can I leave the account to another individual upon death, as with an IRA?

Yes. If your spouse is the person inheriting the account, the account can remain classified as an HSA. If the inheriting person is not a spouse, the account will no longer be treated as an HSA and the fair market value of the account becomes taxable to the beneficiary in the year of your death.

11. What is the contribution deadline for HSAs?

As with an IRA, contributions into an HSA may be made until April 15 (or tax filing deadline) for the prior tax year.

12. How have HSA rules changed in response to COVID-19?

As part of the CARES Act, the list of qualified medical expenses for using an HSA was expanded. Items added include feminine hygiene products and certain over-the-counter medications. The rules apply to items purchased after December 31, 2019.

An additional, temporary rule change affects High Deductible Health Plans (HDHPs). Under the CARES Act, telehealth services may be covered by an HDHP that has a deductible or below the minimum deductible otherwise required. The new rule applies to services provided on or after January 1, 2020.

Video: Self-Directed HSA FAQ

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13. What are the primary advantages of Health Savings Accounts?

• HSAs allow you to provide for current and future uncovered medical expenses without having to worry about losing unused funds at year’s end, as you would with some savings plans.
• You may choose your custodian and the types of investments used to help the account grow.
• You decide how much to contribute in any one year, up to the contribution limits.
• You make the decision to pay current expenses from the HSA or to save the money for future expenses.
• Accounts are completely portable. You may leave one employer and move to another without losing control of the account.

However, if your employer has a low deductible plan, you won’t be able to contribute to the HSA but can still invest current funds.

14. What are the tax benefits of HSAs?

• Contributions to the account are above-the-line deductions.
• Contributions accumulate in the account tax-free.
• Returns on investments in the account also accumulate tax-free.
• Distributions are made from the account tax-free, provided that they’re used for qualified medical expenses.
• A tax consequence will occur if the funds are withdrawn and used for something other than qualified medical expenses. Even then, for those over the age of 65, the funds are taxed at ordinary income tax rates.

15. Are HSA contributions tax-deductible?

Yes, but only those contributions made by the individual. Employer contributions aren’t tax-deductible.

16. How do I open a self-directed HSA?

A self-directed HSA can be opened by completing an application. Click here to get started.

For more information on HSAs and how one can be established for you, start a conversation with a knowledgeable account counselor.