Do you want to save for medical expenses and reduce your taxable income at the same time? A Health Saving Account (HSA) may be right for you. Before you sign up for an HSA, it’s important to understand that the money must only be used for HSA-qualified expenses. If you spend the money on ineligible items, then you will need to pay income tax and penalties. We cover HSA eligible expenses, including 10 expenses that you may not know about.
What is a Health Savings Account and how does it work?
A health savings account (HSA) is a savings account that can be used for health-related expenses. HSAs allow you to save pre-tax dollars for future health needs. They are often referred to as triple tax-advantaged accounts because contributions are not taxed, the money can be invested and grow tax-free, and any withdrawals for HSA-eligible expenses also aren’t taxed.
You can use your HSA to pay for qualified medical expenses for yourself, your spouse, and your eligible dependents. They can be a helpful tool when it comes to saving money for health expenses.
Why should I open an HSA?
One of the major advantages of an HSA is that it is a tax-advantaged account. You can deduct your HSA contributions from your taxable income. You can invest your HSA in mutual funds or other investment tools and let the money grow tax-free.
Am I eligible for an HSA?
To be eligible for an HSA, you must:
– be enrolled in an HSA-eligible high-deductible health insurance plan (HDHP).
– have no other health coverage
– not be enrolled in Medicare
– not be a dependent on someone else’s tax return.
It is important to call your health insurance provider, to make sure your plan is HSA-eligible. Not all high-deductible health insurance plans are HSA-eligible.
What expenses are eligible for HSA?
We have compiled a list below of some common IRS-approved HSA-eligible expenses. Always check with your HSA plan provider to make sure that a particular expense is covered.
|Acupuncture||Hearing aids||Post-nasal treatments|
|Alcoholism treatment||Laboratory fees||Prenatal care|
|Artificial limb||Learning disability fees (prescription)||Prosthesis|
|Artificial teeth||Life-care fees||PSA test|
|Bandages||Lodging (for out-patient treatment)||Psychiatric care|
|Birth control pills (prescription)||Long-term care (medical expenses)||Psychiatrist|
|Breast reconstruction||Long-term care insurance||Psychoanalysis|
|Car special hand controls(for disability)||Meals (while receiving treatment)||Psychoanalyst|
|Chiropractors||Medical conferences (for ill spouse/dependent)||Psychologist|
|Christian Science practitioners||Medicare deductibles||Radium treatment|
|COBRA premiums||Nursing care||Smoking cessation programs|
|Contact lenses||Obstetrician||Special education for children|
|Cosmetic surgery (from trauma or disease)||Operating Room Costs||Spinal tests|
|Dermatologist||Orthopedic shoes||Telephone & TV for hearing impaired|
|Disabled dependent care||Out-of-pocket expenses (Medicare)||Vaccines|
|Drug addiction treatment (inpatient)||Breast Pumps||Vitamins (if prescribed)|
|Transportation expenses for treatment||Oxygen and equipment||Wheelchair|
|Fertility enhancement||Pediatrician||Weight loss programs|
|Guide dog||Personal care services (for ill)||Wig (hair loss from disease)|
|Health institute (if prescribed)||Post-nasal treatments|
Important to know – The CARES Act expanded the list of HSA-eligible items to now include over-the-counter purchases such as allergy, cough, and cold medicines.
10 common HSA-eligible expenses that you may not know about:
- Sunscreen: Sunscreen is one of the most important items to protect your skin and to decrease the risk of skin cancer. HSA covers over the counter sunscreen of all types.
- Lip balm: If you want your lip balm to be an HSA-eligible expense without needing a note from your doctor, then you should purchase one that has a minimum SPF 15 and has broad-spectrum protection.
- Prenatal vitamins: While vitamins for general health aren’t HSA eligible, prenatal vitamins are because they help prevent birth defects and support fetal development.
- Aloe Vera: Aloe vera is a great remedy if you do suffer from a sunburn. However, in order to use your HSA, you do need a prescription from your doctor for aloe vera.
- Prescription glasses: As long as your doctor provides a prescription, then prescription glasses are an HSA-eligible expense.
- Athletic tape and wraps: You can get athletic bandages, braces, cooling and heating wraps without needing a prescription from your doctor.
- Fitness tracking device: If you believe that a fitness tracker is a medical necessity for your health, then you can get a prescription from your doctor, and a fitness tracking device will be covered.
- Tampons, pads, and other female hygiene products: All of these items are now considered an eligible HSA expense thanks to the CARES Act.
- Condoms and contraceptives: Condoms and contraceptives play an important role in preventing sexually transmitted diseases and supporting positive reproductive wellness.
- First aid: You can use your HSA savings to purchase a pre-assembled first aid kit or you can put together first aid supplies to build your own personalized first aid kit.
This page contains the complete HSA eligibility list if you want to make sure that something is eligible before making the purchase.
If you purchase products on Amazon, there is also a storefront dedicated to HSA and FSA-eligible items.
What expenses are not HSA eligible?
Some expenses that aren’t eligible include vitamins for general health, maternity clothes, funeral costs, childcare for healthy babies, over-the-counter medicine, and elective cosmetic procedures.
What is the maximum contribution amount for an HSA for 2023?
The maximum contribution amount for 2023 is $3,850 for individuals and up to $7,750 for families. People over 55 can contribute an extra $1,000 annually. The table below shows the increase in HSA contribution limits from 2022-2023.
HSA Contribution Limits 2023
|Self-only coverage||Family coverage||Self-only coverage||Family coverage|
|HSA Contribution Limits||3650||7300||3850||7750|
|HSA Catch-Up Contribution Limits (aged 55 or older)||1000||1000|
How can I open an HSA?
You can open one with most health insurance companies or at a financial institution.
How do I pay with my HSA?
There are three ways that you can pay with your HSA
1. Use your Optum Financial payment card
2. Pay out of pocket and then pay distribute funds from your HSA to reimburse yourself
3. Use an online bill.
What is the benefit of having an HSA?
Healthcare costs seem to be forever rising, especially as you get older, so it’s important to have money that you can use to cover these expenses.
- No federal income tax: An HSA can help lower your taxable income which means that you will pay less in taxes.
- No expiration date on the funds: Money in your HSA account will earn tax-free interest, and any unused funds will always roll over to the next year.
- Helps you budget for healthcare expenses: If you have money in your HSA, then you can readily use that money for qualified medical expenses whenever they arise. You could also treat it as your medical emergency fund.
- Can help you save for retirement. Once you reach 65, you can use the funds in your HSA for any purpose without a penalty.
- Possible use for spouse and dependents: Sometimes you can use your HSA to pay for qualified medical expenses for your spouse and dependents, even if your high deductible health plan doesn’t cover them.
What is the downside of an HSA?
The main downside is that you must be enrolled in an HSA-eligible high deductible plan. A health insurance deductible is the amount of money that you pay out of pocket before your insurance benefits begin. Another major downside is that you must spend your HSA money on HSA eligible expenses, otherwise you will need to pay income tax and a 20% penalty (if aged 65 and under).
What happens if I accidentally make a purchase that is not HSA eligible?
If you use your HSA debit card or check then the purchase will go through but you will need to pay income tax on that amount. If you’re under 65 and spend the money on an unqualified purchase then you must also pay a 20% penalty on top of the income tax. Therefore, it is very important to make sure that your purchase is eligible before completing the transaction.
Can I open a HSA if I am self-employed?
Yes, you can open a HSA if you are self-employed. Any individual with an HSA-eligible HDHP can open an HSA.
Do I have to use all of the money in my HSA every year?
No, you don’t have to use all of your money in your HSA every year. Unlike an FSA, your HSA contributions will roll over to the next year. This allows you to grow your HSA every year.
Is an HSA the same as an FSA?
No, an HSA is not the same as an FSA. An FSA (flexible spending account) allows you to use pre-tax dollars for medical expenses but they must be used by the end of the calendar year otherwise you lose them. HSAs do not have an expiration date. If you want to learn more about the differences, read our HSA vs FSA blog.
Is an HSA the same as an HRA?
No, an HSA is not the same as an HRA. The major difference between a HSA and an HRA is that you own an HSA and your employer owns the HRA. Our HSA vs HRA blog outlines the key differences.
Can I withdraw money from my HSA?
Yes, you can withdraw money from your HSA. However, if you use those funds for something that is not an HSA-eligible expense then those funds will be taxed as ordinary income and the IRS will impose a 20% penalty.
- If you withdraw money from your HSA before you’re 65 for expenses that don’t qualify, you will need to pay the federal income tax and a 20% tax penalty.
- If you take funds from your HSA after you’re 65 for expenses that don’t qualify then you don’t have to pay the 20% tax penalty, but you’ll still have to pay the federal income tax on that amount.
What happens to my HSA funds if I die?
If you die then the funds in your HSA will go to the named beneficiary of the account. If there is no beneficiary named on your account, then the funds will go to your estate.
Some additional HSA tips:
- Make sure that you review a list of HSA-eligible expenses before spending the money. You don’t want to accidentally go over your budget, or make a purchase that is not HSA-eligible.
- You have payment options at checkout. You can access your HSA funds using your HSA debit card, HSA checkbook, or you pay for the expense out of pocket and then submit a claim. Think about what payment option is going to suit you before going to purchase the expense.
- Always save your purchase receipts. It’s a good idea to keep your purchase receipts in case you are ever audited by the IRS.
Is an HSA worth it?
An HSA can be a cost-effective option for individuals and their families. As with most investments, starting an HSA at an early age can help secure your financial future. If you have any questions about financial planning, or if you want to see how we can help you achieve your financial goals, schedule a free discovery call today.
Alvin Carlos, CFP®, CFA is an investment advisor and fee-only financial planner, in Washington, D.C that works with clients across the country. He has a Master’s degree in International Relations from SAIS-Johns Hopkins. Alvin is a partner of District Capital, a financial planning firm designed to help professionals in their 30s and 40s achieve their financial goals through smart investing, reducing taxes, retirement planning, and maximizing their money. Schedule a free discovery call to learn how we can help elevate your finances.