More people are signing up for Health Savings Accounts (HSAs) than ever before. As of last year, about 25 million Americans were enrolled in one, up 13 percent from 2017. Indeed, the current requirements to qualify for an HSA as an individual are fairly simple: you must be covered under a high deductible health plan (HDHP); that you have no other health coverage (with a few straightforward exceptions); that you aren’t enrolled in Medicare; and that you can’t be claimed as a dependent on someone else’s tax return. By placing money in an interest-bearing HSA, you can save for future qualified medical expenses while allowing your HSA account balance to grow tax-free.*
As more employers and individuals turn to HDHPs because of their lower premiums, more individuals are discovering that they are qualified for an HSA. If you’re among them, this list will help shed light on some of the most common mistakes people make with HSAs, and how to avoid them.
Contributing Too Little, Or Too Much
Determining how much to contribute to your HSA is different for everyone, of course, and variables include everything from how much you’re making to your current and anticipated medical expenses.
Annual contribution limits for 2019 are $3,500 for individuals, $7,000 for families and an additional $1,000 for people 55 and older.
One factor in deciding how much to contribute is your own risk tolerance. For instance, how concerned you feel about the likelihood of an illness or life event that may occur. Then, you may want to consider contributing a robust amount to your HSA. Those more comfortable with betting they’ll continue to stay healthy and have significant monthly expenses may consider contributing less.
Regardless of how much you choose to contribute, many experts agree that participating is a good idea. You can use your HSA funds today or save them for future qualified medical expenses. HSAs can be a great tool for retirement planning in terms of health care spending. Most employers allow HSA contributions to be deducted from their employees’ paycheck at pre-tax dollars and deposit funds directly to their HSA.
Losing Track of the IRS’s Contribution Restrictions
The IRS will penalize you if you contribute too much to your HSA, period. The penalty is a 6 percent excise tax, which accrues every year the excess goes uncorrected. That’s why it’s important to stay on top of how much you’re allowed to contribute from year to year, because these figures will change annually. Once you become aware of the excess contribution, notify your bank immediately so proper documents are completed to withdraw the excess from your account.*
Using HSA Fund Money for Non-Qualified Purposes
The IRS frowns on the misuse of HSA funds — to the tune of a 20 percent penalty for non-qualified expenses and liability for income taxes upon withdrawing funds. You may withdraw money for purposes that are not IRS-eligible. In this case, your contributions remain tax-free in the year they were made, your account growth remains tax-deferred, but you must include your distribution as taxable income in the year withdrawn and pay 20% penalty, if applicable.*
Not Correcting Mistaken Contributions or Withdrawals
Fortunately, the IRS accounts for the fact that over-contributing and mistaken charges happen to the most well-intentioned HSA participants, which is why there is recourse if you stumble into one of these circumstances. Say, for example, you pay a medical bill using funds saved in your HSA; later you are reimbursed because you didn’t realize that expense was fully covered by your insurance. The money in such case must be returned to your HSA to avoid a penalty. It’s that simple.
Confusing HSA Rules with FSA Rules
There are major differences between HSAs and Flexible Spending Accounts (FSAs), but one wouldn’t be alone in confusing their specific qualities. Among the big ones you’ll want to pay attention to:
- Your hard-earned HSA funds can be rolled over to subsequent years’ savings. That is NOT the case with FSA funds, which require participants to spend down the money in their accounts before the end of the year or forfeit those funds entirely.
- Your HSA will follow you when you change jobs. With few exceptions, this is not the case with money in your FSA fund.
- HSA funds are more flexible in the sense that you can change the amount you choose to contribute at any time. With FSAs, you can only change your contribution amount during open enrollment or under other very specific circumstances.
*Consult your tax advisor