Opening a healthcare savings account, or HSA, may be one of the best decisions you can make about your healthcare coverage. HSAs allow you to deposit money into an account to cover your healthcare costs not paid by your insurance. HSAs are usually combined with a high-deductible health plan, or HDHP. High deductible plans allow you to pay the first 12 to 25 percent of your yearly healthcare bill then pick up almost 100 percent of the remaining cost. By investing in an HSA, you can be sure to have the cash available to pay for your healthcare needs.

Tax Advantages of a Health Savings Account (HSA)

The deposits you make to your HSA are tax-deductible in most cases. The deductible nature of your deposits depends on how you spend the money in your HSA. Since you have almost complete control over the funds in your account, you can theoretically spend the money on anything, but if the spending does not meet standards for HSA funds, you may be subject to a 20 percent penalty plus income tax on the amount you spend. There is an important exception to this rule: if you are over 65, you can withdraw money from your HSA for any purpose without penalty. You will, however, still have to pay income tax on your withdrawals.

What can I use the funds in my Health Savings Account for?

Therefore, it is important to understand the expenses you are allowed to pay with your HSA funds. The IRS publishes a list of all qualified expenses allowed under HSA rules in a document called the 213(d) list. You can spend your HSA funds on any expense classified as medical or dental products, services, or procedures. There are also provisions for alternative medicine and wellness products and services. HSA funds can be used for:

  • Transportation to or from medical facilities, including ambulance transport and medical shuttle buses. You can also pay for private transportation to and from a medical facility for treatment within reason.
  • Visits to your doctor’s office, the hospital, a clinic, pharmacy or any healthcare facility
  • Prescriptions, medical tests or surgery costs
  • Physical therapy, acupuncture, artificial limbs, chiropractic treatment and reconstructive surgery after a mastectomy.
  • COBRA payments to pay for insurance from former employers.
  • Dental treatments are allowed, including dentures and artificial teeth
  • Eye exams, glasses, contact lenses, and supplemental supplies are all covered, as well as eye surgery.
  • Even Braille books and magazines and guide dogs are allowed under HSA plans. Laser eye surgery is also allowed.
  • test kits for diabetics, hearing aids, and weight-loss systems and foods.
  • HSA funds are also available for preventative and therapeutic treatments such as alcoholism and drug rehabilitation, crutches, walkers, and wheelchairs.

The range of items and services available for purchase with HSA funds is quite wide. Generally speaking, anything that can be even remotely classified as medical or medically-related is allowed. There are some limitations: for example, travel expenses for patients, including lodging, are allowed, but with a limit of $50 per day. Reconstructive surgery is limited only to mastectomy patients. Most expenses are fully covered, but there are some spending limits on certain items.

What is the CAP on funds I can use from my Health Savings Account?

Even with these restrictions, however, HSAs still remain one of the most viable ways for you to pay expensive medical bills. This is because the amount you pay is effectively capped each year, allowing you to plan for your medical budget. As an example, if you have a regular health insurance plan that has a $500 deductible and a 20 percent co-pay, you will pay $2,400 on your covered expenses if you have $10,000 in medical bills.

This does not include your out-of-pocket spending for non-covered items. However, if you have an HSA and a HDHP with a deductible of $1,500, you will deposit a minimum of $125 per month in your HSA and pay your premium. You will probably not have any other out-of-pocket expenses because you will pay for your first $1,500 from your HSA funds; your HDHP will pay most of the remaining balance of your healthcare bills.

Before you open an HSA through work or on your own, be sure you understand the terms of your HDHP and be sure that other options are not better for you. You should also be sure that you open your HSA properly to ensure that you gain the tax benefits from the account.