Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.
Can I use my HSA for dental expenses?
Can I use my HSA for my spouse or someone else?
Can I use my HSA for massage?
Can I use my HSA for vision?
Can I use my HSA for Botox?
Can I use my HSA for therapy?
Can I use my HSA for physical therapy?
Can I use my HSA for a gym membership?
Can I use my HSA for vitamins?
Can I use my HSA for LASIK?
One of the biggest financial challenges people face is covering the high costs of healthcare. Especially as you get older, your healthcare costs tend to rise much faster than inflation. Having a nest egg set aside to cover out-of-pocket health expenses is crucial.
Health savings accounts (HSAs) are designed to incentivize saving money for future healthcare needs. Congress created health savings accounts in 2003 to confer tax advantages to people who set money aside for their healthcare costs.
To contribute to an HSA, you need to have a high-deductible health plan (HDHP). That's because HSAs are meant for those whose health insurance doesn't cover any costs until the insured has already paid a substantial amount. Another HSA rule pertains to maximum annual contributions limits, which are set annually by the Internal Revenue Service (IRS).
Keep reading to find out exactly what types of expenses are covered by HSAs.
The IRS has a broad list of expenses related to medical, dental, and vision care that it considers as qualified expenses for HSAs. As long as you spend your HSA funds on any of these IRS-approved expenses, the distribution is not taxed.
Many HSA-eligible expenses are those not ordinarily covered by regular insurance. You can use your HSA to fund copayments and to pay for eligible expenses for yourself and also for your spouse and your dependents. Expenses incurred by adult dependents are eligible provided the recipient is covered by an HDHP and not otherwise insured.
Your HSA must be formally "established" before any expenses can be eligible. State law determines when your HSA is officially established. In most states, if you become eligible for an HSA on Jan. 1, but your first contribution (deducted from your paycheck) doesn't reach your HSA administrator until Jan. 10, then your HSA isn't considered established until Jan. 10.
Here are some common IRS-approved HSA-eligible expenses. Note that this list is not all-inclusive. Always check with your plan provider if you have questions about whether an expense is covered.
Under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act that passed in March 2020, additional expenses became HSA-eligible. Many of these are over-the-counter (OTC) medications and products that previously were HSA-eligible only with a prescription:
Under the IRS rules, the following expenses may be HSA-eligible if you have a doctor's note indicating that the product or service is necessary to treat a medical condition. Whenever you have an expense that requires a diagnosis to be HSA-eligible, be sure to obtain the necessary documentation from your medical provider.
If you need an item or service that you don't see listed here, you can find out if it's HSA-eligible by searching the HSA Store online.
The IRS typically disallows using funds from an HSA for the following types of expenses:
Both an HSA and a flexible spending account (FSA) are tax-advantaged accounts designed to help you save money for medical expenses. The same medical expenses are eligible for coverage with HSAs and health FSAs. Other less-common types of FSAs can be used to cover dependent care or adoption-related expenses instead of medical costs.
The key difference between an HSA and a health FSA isn't which expenses are covered, but rather who controls the money in the account. An HSA is like a 401(k) plan in the sense that you own the account's funds. You can contribute to an FSA only if your employer offers one, and the employer owns the account. If you leave your job for any reason, you'll usually forfeit the money in an FSA. Funds in an FSA typically cannot be rolled over from one year to the next, and you also typically can't contribute to both an HSA and an FSA at the same time.
Contributing to a HSA confers tax advantages, and you can also benefit from employer contributions to an HSA on your behalf. If your employer provides health insurance through an HDHP plan but doesn't offer an HSA, you can establish one independently through an HSA provider such as HSA Bank or Fidelity.
If you contribute to an HSA, it's important to pay attention to which of your expenses qualify since the penalties for using HSA funds for non-qualifying expenses are steep. Ineligible distributions are considered as taxable income, and, if you're younger than 65, your HSA is charged a 20% penalty on the ineligible amount withdrawn.
HDHPs can be expensive if you have, or expect to incur, major medical bills. But if you are in good health and have an HDHP, then supplementing it with an HSA can be great way to save for future medical expenses and supplement your retirement savings.
