You may know that a health savings account (HSA) lets you set aside pretax earnings to pay health-care expenses. But HSA rules are complex, and if you don’t understand exactly what they say, you might leave a lot of money on the table—and you might even get hit with monetary penalties. Here are seven costly HSA myths you must protect yourself from…

Opening and Contributing to an HSA

Myth: I’m automatically eligible to fund an HSA if I have a qualifying high-deductible health insurance plan. 

Reality: You might not be eligible if you or your spouse has a flexible spending account (FSA), which similarly lets you contribute pretax money to be used for health care—but only until a specified deadline. Even a spouse’s FSA typically will disqualify you because money from one spouse’s FSA can be used to pay the other spouse’s medical expenses. Exceptions: You can have an FSA and still fund an HSA if the FSA is a ­“dependent care” FSA that covers expenses such as child care or elder care, not medical bills…a “limited purpose” FSA that covers only dental and/or ­vision expenses…or a “postdeductible” FSA that covers most medical costs but only after a deductible of at least $1,400 ($2,800 for a family) has been paid with non-FSA dollars. 

Myth: The deadline for contributions to an HSA is the end of the year. 

Reality: If you fund your HSA by having your employer deduct pretax money from your paychecks, that withholding likely will end at the end of the calendar year—but you also can make contributions on your own up to the income tax filing deadline for that tax year, which is typically April 15 of the next year. (You cannot get an extension on this deadline even if you file for an extension on your tax return.) This is especially helpful if you want to maximize your contributions, but in the second year, you no longer have a high-deductible health insurance plan that qualifies you to contribute to an HSA.

Your total HSA contributions for a particular tax year, including both payroll deductions and your own contributions, are subject to an annual limit, however—in 2020, that limit is $3,550 for an individual or $7,100 for a family, plus an extra $1,000 allowed for people age 55 or older. This limit includes contributions that you make by April 15 of the following year. Contributions you make on your own rather than through payroll deductions will be subject to Social Security and Medicare taxes, though not income taxes. 

Spending HSA Money

Myth: There’s a deadline for when you can reimburse yourself from an HSA after you use non-HSA money to pay for a medical expense. 

Reality: There is no deadline on taking reimbursements from an HSA. As long as the HSA was open when the health-care expense was incurred, you can use it to pay that expense with pretax dollars from the HSA—even years later. Example: You have just $100 in your HSA when you require surgery that leads to $10,000 in out-of-pocket costs. You can initially pay these medical bills from your nontax advantaged savings…then make pretax contributions to the HSA for months or even years…and reimburse yourself from the HSA in stages or all at once depending on your preference. 

Myth: Money in an HSA can be used to pay medical expenses only for someone who has a qualifying high-deductible health plan. 

Reality: You must have a high-­deductible health plan to make contributions to your HSA, but once money is in the account, you can use it to pay not only your own medical expenses but also medical expenses of your spouse and dependents—even if they do not have a qualifying insurance plan. 

Myth: I can use my HSA to pay health insurance premiums. 

Reality: Usually this is not allowed, but there are exceptions. HSA dollars can be used to pay health insurance premiums for yourself, your spouse and/or dependents if the premiums are for someone receiving federal or state unemployment benefits…or continuation coverage such as COBRA (which allows the person to purchase health insurance temporarily through a former employer after losing a job). If you are age 65 or older, HSA money also can cover premiums for Medicare and for long-term-care insurance up to certain limits.

Myth: Money I put in an HSA will earn almost no interest. 

Reality: That’s up to you. Most HSA accounts are indeed at banks or credit unions earning little or no interest—but you could instead set up an HSA with a provider that lets you invest the money in stocks, bonds and/or mutual funds. Examples: Health Savings AdministratorsHSA BankOptum BankHealthEquity. 

Investing HSA dollars in stocks or stock mutual funds can be risky if you expect to need the money to pay health-care costs soon because the value of the investments could fall. But if you don’t expect to need it soon, HSAs can be a wonderful way to invest because you don’t have to pay taxes on the money when you earn it or when you withdraw it, assuming the withdrawals are for qualified health-care expenses. That’s a better tax break than you’ll get even from a conventional or Roth IRA or 401(k). (If you’re worried that you’ll never need this money for health-care costs, stop worrying—the typical couple has $280,000 in out-of-pocket health-care costs after age 65, according to Fidelity Investments.)

If your employer does not offer an HSA provider that includes investment options, open an HSA with a provider that does, and periodically transfer money from the employer-­selected HSA to this HSA. There should not be any tax consequences as long as this is done via a direct transfer from one financial company to the other. Check with both HSA providers about potential transfer fees, and transfer money only a few times per year if there are transfer fees. Do not close the ­employer-selected HSA account even if you don’t like it—many employers will deposit payroll deductions only to the HSAs that they selected. 

Myth: It’s illegal to spend money from an HSA on non–health-related expenses. 

Reality: It’s not illegal—it just means that you will have to pay income tax on this money and potentially a 20% penalty. You won’t face that penalty if you spend the money after you reach age 65.  

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