Learn what changes the new health care legislation will have on HSAs.
Benefits of a Health Savings Account (HSA)
Several weeks ago I wrote about the benefits of Health Savings Accounts or HSAs. These nifty, government-sponsored accounts are allowed for anyone who’s covered by a high deductible heath plan. You avoid paying tax on HSA contributions and earnings when you spend the money on certain medical expenses or reimburse yourself for them. In this article I’ll cover some of the changes that are coming down the pipe for HSAs due to health care reform. I’ll also tell you what you can pay for with an HSA and the best places to find one.
Which Medical Expenses Can You Pay for with a Health Savings Account?
Let’s start by reviewing the types of expenses that you can pay for with money you contribute to an HSA. They include medical and dental expenses that are normally tax deductible when you itemize deductions on your tax return. But please note that you can’t pay for expenses with HSA funds and claim a tax deduction for the same expenses. That would be double-dipping on tax benefits, which the IRS doesn’t allow. However, the IRS does allow you to claim a tax deduction for your HSA contributions, even if you don’t itemize deductions on your tax return.
Tax-deductible medical expenses are defined as costs for the diagnosis, treatment, or prevention of disease. They include the cost of prescription drugs, medical equipment, medical supplies, long-term care services, most insurance premiums, dental expenses, and vision expenses. There are actually 78 categories of tax-deductible medical expenses listed in IRS Publication 502. Don’t worry—I won’t go through all of them! But here are a few that you might not be aware are tax-deductible:
- Home improvements related to medical care
- Chiropractor visits
- Psychoanalysis and psychiatric care
- Treatment for drug addiction
- Legal fees related to medical matters
- Removal of lead-based paint
- Weight-loss programs
- Smoking-cessation programs
- Prescription sunglasses
- Transportation, lodging, and meals when you travel for medical care
Remember that any expense that’s tax-deductible can be paid for with HSA funds.
Expenses You Can’t Pay for with a Health Savings Account
But don’t confuse a qualified medical expense with something that’s simply beneficial for good health, such as a gym membership, swimming lessons, or vitamins, for instance. Those expenses are generally not tax-deductible. Nor can you deduct expenses that are cosmetic in nature or related to personal hygiene, such as teeth whitening, toiletries, or non-prescription medicines. Because they’re not tax-deductible, you can’t pay for those types of personal care expenses with HSA money.
How Will Healthcare Reform Affect Heath Savings Accounts?
There’s a unique benefit of HSAs that healthcare reform will prohibit starting next year. That’s the ability to use HSA money for over-the-counter medicines. Even though over-the-counter medical products like bandages, Neosporin, cough syrup, and aspirin are not tax deductible, they have been permitted as an allowable tax-free expense from an HSA. However, starting in 2011, the only medication that you can purchase with HSA funds will be prescription drugs and insulin.
Another way that healthcare reform will affect health savings accounts is that it raises the penalty for spending HAS money on something that isn’t allowed (or a nonqualified distribution). Right now the penalty is 10% plus ordinary income tax on the amount. But if you slip up and use HSA funds for a nonqualified distribution starting in 2011, the penalty will be doubled to 20% plus ordinary income tax.
Where to Find the Best Health Savings Accounts
[[AdMiddle]Health Savings Accounts are similar to checking accounts in that they usually come with a debit card, checks, and online banking services. That makes paying for qualified expenses from an HSA (or reimbursing yourself) really easy. You can earn a modest interest rate and usually only have to pay a small monthly or annual fee. Interest rates depend on where you live and how much you have in the account (higher balances earn more). Credit unions tend to have some of the most competitive HSA rates—so if you belong to a credit union, check there first.
The Best Health Savings Accounts
Here are four of the best Heath Savings Accounts that I’ve found:
- American Chartered Bank offers up to 1% APY (annual percentage yield) with no fees.
- HSAbank.com offers up to 2% APY with monthly fees of $2.25.
- Bank of America offers up to 1.5% APY with monthly fees of $4.50.
- State Farm Bank offers up to 1.39% APY with annual fees of $25.
Where to Find a High Deductible Health Plan
Even though healthcare reform will reduce the overall tax break you get from an HSA next year, an HSA will still be a great benefit. If you have a high-deductible health plan or are considering getting one to lower your insurance costs, don’t miss out on the opportunity to open up an HSA. You can shop for a high-deductible health plan at sites like GoldenRule.com and eHealthInsurance.com.
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