If you’ve already done your taxes for this year, you may have heard about HSAs. Nearly 3 in 10 Americans use an HSA, with more than 20 million accounts in existence today. An HSA, or Health Savings Account, is a savings account that uses pre-tax money for health expenses. Some of these health expenses are things you might know you’ll have ahead of time, such as paying for glasses, contacts, or braces. It’s a good way to lower your overall healthcare costs, but only if you qualify and learn how to make the most of your account.

Below, we’ll discuss five things you need to know about HSAs, including how HSAs work, what expenses are covered by HSA, what happens if you use your HSA for non-medical expenses, and more.

1. You have to have a high deductible health plan to use an HSA.

If you’re covered under a health plan at work, your plan may not automatically qualify for an HSA. According to HealthCare.gov, HSAs can only be used under a High Deductible Health Plan (HDHP), which includes health plans that have a deductible of at least $1,350 for individuals or $2,700 for families. Under HDHPs, you’ll pay a lower premium than most plans, but higher out-of-pocket expenses if you should need medical services, including on deductibles, co-pays and co-insurance. Total annual out-of-pocket costs under these plans for in-network services cannot be more than $6,650 for individuals or $13,300 for families.

You can ask your employer if your plan is HSA-eligible, though if you’re filling out a benefits form online most will indicate HSA-eligible plans. Additionally, if you get health insurance through the government’s Marketplace, plans that are HSA-eligible will be identified. Some banks also offer HSAs. Aside from those who do not have a HDHP, other people who are not eligible for HSAs are those enrolled in Medicare and those who can be claimed as a dependent on someone else’s tax return.

It should be noted that HSAs are not the same thing as FSAs — Flexible Spending Accounts — although they both are savings accounts that you put tax-free money into to help pay for healthcare expenses. Your employer may kick in money to your FSA, but they have time limits for spending in addition to limits on how much you can carry over year to year. For more on FSAs, check out HealthCare.gov’s link on Using a Flexible Spending Account.

2. There are contributions limits to HSAs.

In 2018, you may only contribute to your HSA up to $3,450 for individuals and $6,850 for families (the latter number changed in March 2018 due to the new tax law). The date you become eligible for an HSA also matters. If you weren’t eligible all year (e.g., you changed your health coverage plan from a traditional plan to HDHP plan after a qualifying event, such as getting married or having a child, or you just started a new job), your contribution limit may be based on the IRS’ “last-month rule.” If you become eligible for an HSA on the first day of the last month of the tax year (Dec. 1), you’re eligible for the entire year — meaning you can contribute the full amount to your HSA through a mid-April deadline of the following year.

However, the last-month rule begins a testing period of eligibility. If your healthcare status changes in that following year and you’re no longer eligible for an HSA, the amount you contributed under the last-month rule must be included in your following year’s income. A 10% tax also applies to this amount.

This area can be a little tricky, so if you’re planning to look for a new job but you just start contributing to an HSA, think again about what your eligibility status might be in the next place you work. Perhaps you’re hoping to move from a larger employer to a smaller employer — most large employers carry HDHP plans while small employers do not, so it’s something to keep in mind.

For individuals who are age 55 and older by Dec. 1, they may contribute an extra $1,000 to their HSA. However, if you enroll in Medicare at any point during the year, including retroactively, your contribution limit is zero and any contributions are considered excess.

3. Only certain medical expenses qualify under HSAs.

The IRS has a full list of HSA-qualifying medical expenses, which are generally those that would fall under a medical and dental expenses deduction on your taxes. Some of the qualifying expenses include:

Acupuncture treatments and chiropractor visits
Alcohol and drug addiction treatment, as well as psychiatric care
Ambulance services
Annual physical examinations and X-rays
Birth control pills
Breast pumps and supplies
Breast reconstruction surgery and breast prosthesis after a mastectomy for cancer
Capital expenses for home improvements related to medical care, such as building a wheelchair ramp, installing support bars, and lowering kitchen cabinets
Contact lenses, saline solution, glasses, and eye surgery (including vision correction)
Crutches and wheelchairs
Dental treatments, including preventative exams, extractions, braces, and dentures
Expenses paid for organ transplants as a donor, including transportation
Hearing aids
In vitro fertilization
In-patient hospital care for medical services (meals and lodging)
Nursing services
Pregnancy test kits
Prescription medicine and drugs
Screening services for cancer, heart disease, pediatric conditions, mental health conditions, and more
Service animal cost (buying, training, maintaining) for people with physical disabilities
Stop-smoking programs
Therapy
Transportation to medical care, including a nurse’s transportation expenses or going to see a mentally ill dependent
Vasectomies
Weight-loss programs for specific disease treatment as diagnosed by a physician
Wigs for patients who have lost their hair from disease

Certain expenses aren’t eligible for HSA payments, including teeth whitening and cosmetic surgery. Any drug that is not prescribed, with the exception of insulin, also isn’t covered (think supplements, vitamins — unless they are recommended by a physician to treat a certain condition). While the cost of attending a stop-smoking program is covered, any non-prescription drugs that would help you complete that program, such as patches or nicotine gum, are not. Funeral payments also are not eligible under HSAs, in addition to payments for future medical care, including medical insurance, beyond the end of the year.

4. There are no time limits to using HSA money.

If you don’t spend all of your HSA in one year, you don’t have to worry — the funds will roll over. If you have other HSAs or an Archer MSA (Medical Savings Account), you can roll that money over into a single HSA. You also don’t have to be currently eligible to initiate a rollover, and rollovers aren’t subject to contribution limits. However, you can only make one rollover contribution to an HSA within a year. Transfers from the trustee of an HSA fund are not considered rollovers and have no limits.

If you take a medical-expense distribution on your HSA, such as for payment on expenses that aren’t reimbursed by your HDHP, you’ll receive these tax-free. However, if you withdraw this money for other reasons, it’ll be subject to income tax in addition to possibly another 20% in taxes on top of that. So, don’t take a distribution unless you need to and it’s for medical expenses! Even if you aren’t eligible for your HSA anymore but still have money in the account, you can still receive a tax-free distribution for qualifying medical expenses.

5. HSAs earn interest — along with other tax benefits.

Another benefit of an HSA is that it has the potential to earn interest, which also is not taxed. Other tax benefits include:

Any amount you contribute yourself can be claimed as a tax deduction, even if you don’t itemize your deductions.
Any contributions your employer makes to your HSA are excluded from your gross income.

Because HSAs continue to grow in value and you can take deductions tax free, they can be a great investment. People who have contributed the maximum for the year to their IRA or 401(k) accounts can use an HSA as another way to invest. And because you can continue to use HSAs year over year without worrying about taking out a certain amount each year, you can save up for bigger medical expenses that may come down the road as we get older (and yes, you can still use the funds during retirement!).

Get Help with Medical Expenses

While we may have made HSAs sound pretty easy to use, they’re actually a bit complex. You’ll want to speak with your plan administrator if you have any questions on how to use your HSA. Your family’s financial advisor also may be able to offer tips on how to best spend HSA money and plan for the future, and your accountant can help you with any tax issues.

Unfortunately, some medical expenses can become overwhelming and go above and beyond the HSA contribution limits — say if suddenly a family member is diagnosed with cancer and no longer able to work. If you have mounting medical debt, we may be able to help. Borowitz & Clark has assisted thousands of people on the path to debt-free lives. Contact us today for a free debt evaluation.