Health savings accounts (HSAs) are revenue enhancement-advantaged accounts that you can use to save money to pay for medical care. HSAs are also excellent retirement savings vehicles since the money you contribute grows tax-free and can be withdrawn for any purpose later on historic period 65.

Strict rules govern who is eligible to apply an HSA, how much coin you can contribute, and what you can use withdrawals for prior to historic period 65. Here are the cardinal HSA rules you demand to know.

Medicine bottle with pills spilling out.

Prototype source: Getty Images.

HSA eligibility rules

Y'all are eligible to contribute to an HSA merely if sure atmospheric condition are met, including the following:

  • Your current health insurance coverage is classified as a high-deductible health plan (HDHP). The definition of a qualifying HDHP changes periodically. For 2022 and 2022, your insurance may authorize as a high-deductible health plan if i of the following is true:
    • Your coverage is self-only (individual coverage), your plan's minimum annual deductible is at least $1,400, and your out-of-pocket annual expense is capped at $7,000.
    • You accept family coverage, your programme has a minimum annual deductible of at least $2,800, and the maximum out-of-pocket limit is $xiv,000.
  • You have no other healthcare coverage, with limited exceptions. Those exceptions may include coverage for:
    • A specific affliction
    • A specific amount of money for hospitalization within a given period
    • Dental or vision care
    • Long-term care
    • An accident or disability
    • Liabilities incurred due to workers' compensation claims, tort laws, or ownership of property
  • Y'all cannot exist claimed as a dependent by someone else for taxation purposes.
  • You are not currently enrolled in Medicare. If you are enrolled in Medicare Function A and/or B, then you may not contribute to an HSA.

HSA rules for contributions

Yous tin can contribute to an HSA and invest the funds, which enables the money in the HSA to grow revenue enhancement-free for as long as you lot like. The IRS sets annual limits, which modify periodically, on the amount you tin contribute to an HSA. Here are the maximum amounts you can contribute to an HSA in 2022:

  • If you have self-only coverage, you tin can contribute upward to $three,650 ($3,600 for 2021).
  • If y'all accept family coverage, y'all can contribute up to $7,300 ($seven,200 for 2021).
  • If you are historic period 55 or older, you can contribute an additional $ane,000 equally a take hold of-upwardly contribution.

If your employer contributes to your HSA on your behalf, that counts toward your annual limit. HSA contributions by and large vest immediately, meaning that any contribution from your employer is yours to keep, even if yous exit your chore shortly afterward your employer contributes the money.

Your contributions to your HSA are made with pre-tax dollars, which allows you to annually claim a tax deduction equivalent to the corporeality of your contribution for the year. Contributions from your employer are not considered equally part of your income and non taxed. However, employer contributions are listed on your Westward-two form in Box 12 and confer a tax benefit to your employer.

Employers offering HSA plans are subject to anti-bigotry rules to prohibit them from offering HSAs that unfairly benefit highly compensated employees. Employers are not necessarily prohibited from contributing more money to the HSAs of certain employees, but they may not offer HSAs exclusively to high earners.

HSA rules for withdrawals

If you withdraw money from an HSA for any reason other than to comprehend eligible medical expenses, you volition be subject to a 20% punishment on the amount withdrawn unless you are historic period 65 or older. This 20% penalisation is double the 10% penalty that applies to early on 401(thousand) or private retirement account (IRA) withdrawals. Money withdrawn from an HSA not used for qualifying medical or dental expenses is taxed equally ordinary income, regardless of whether you incur the penalty.

Unlike with flexible spending accounts, you do not have to spend money in an HSA in the same year you make the contribution. You also are not subject field to the rules for required minimum distributions (RMDs) that utilise to other types of pre-tax retirement savings accounts such as 401(g)s and traditional IRAs.

What is a qualifying medical expense for an HSA?

The IRS defines qualifying medical expenses as "the costs of diagnosis, cure, mitigation, handling, or prevention of disease, and for the purpose of affecting any part or part of the torso."

The IRS doesn't consider a medical expense to be "qualifying" just because it may by and large do good your health. For example, the IRS specifically states that holiday costs are non-qualifying expenses, even if getting away may exist beneficial to your mental or physical health. Qualifying expenses must be "primarily to alleviate or prevent a physical or mental disability or illness."

The IRS provides a long listing of qualifying expenses in Publication 502 to aid y'all make up one's mind if you can utilise your HSA funds to pay for a particular product or service. You tin use your HSA funds to pay qualifying expenses for both yourself and eligible dependents.

You can generally apply HSA funds to pay for medical services offered by practitioners, along with diagnostic devices, supplies, and equipment care providers demand to offering their services. Some of the nearly common HSA-eligible expenses are:

  • Prescription medications
  • Acupuncture and chiropractic care
  • Ambulance services
  • Dental services, including dentures
  • Eye care, including contact lenses and glasses
  • Infertility treatments
  • Hearing aids

These are some of the expenses the IRS specifically designates as non HSA-eligible:

  • Babysitting or child care
  • Controlled substances such as medical marijuana or drugs that are federally illegal
  • Corrective surgery
  • Dancing lessons
  • Diaper services
  • Electrolysis
  • Funeral expenses
  • Hair transplants
  • Health society dues
  • Household help
  • Insurance premiums
  • Motherhood clothing
  • Medications imported from outside the U.Southward.
  • Nonprescription drugs except for insulin
  • Nutritional supplements
  • Personal use items such as toothpaste and toothbrushes
  • Swimming lessons
  • Teeth whitening
  • Veterinarian intendance
  • Weight loss programs, unless part of treatment for specific diseases

Several online stores sell only HSA-eligible products. Searching these stores' databases can aid you decide if a particular medical production is covered past your HSA. You are non required to buy HSA-eligible items from any detail provider.

HSA reimbursement rules

You can either spend coin on qualifying HSA expenses and exist reimbursed or use an HSA debit card to pay for qualifying costs.

Using a debit card can be easier, just non all HSA accounts offering this option, and not all eligible medical services are payable via debit card. If yous pay for the qualifying expenses and want to be reimbursed, you must submit receipts before you lot can receive the reimbursement.

HSA rules after age 65

Once you lot achieve age 65, y'all can withdraw money from your HSA for whatever purpose without incurring a penalization. If yous are historic period 65 or older and withdraw coin from your HSA for any reason other than to pay for a qualifying medical or dental service, you are taxed on the distribution at your ordinary income tax rate. In other words, the distribution is treated the same equally a withdrawal from a traditional IRA or 401(yard).

How to beginning an HSA

While there is plenty to empathize virtually how wellness savings accounts piece of work, opening an HSA is relatively simple. Almost HSAs are employer-sponsored, although you tin can also open an HSA with one of many financial institutions.

Many employers offering qualifying loftier-deductible wellness plans likewise offer HSAs. To enroll, you simply need to complete the necessary paperwork and adapt to have your HSA contributions deducted from your paycheck. Y'all will too need to invest the funds in your HSA by choosing how to allocate the money, simply like you would with any retirement savings account.

While you are allowed to maintain multiple HSAs if yous choose, the almanac contribution limits set past the IRS apply to all of your accounts combined.