How health savings accounts work
- An HSA is a tax-deductible savings account used in conjunction with an HSA-qualified high-deductible health plan.
- Contribution limits for 2020 are $3,550 if your HDHP covers just yourself, and $7,100 if it covers at least one other family member.
- You can buy HDHPs through a state exchange – or off-exchange.
- Under new IRS rules, HDHPs are allowed to cover COVID-19 testing and treatment pre-deductible.
- Coronavirus relief act changes the rules to allow OTC medications and menstrual products to be purchased with HSA funds.
- IRS expands preventive care umbrella to include some chronic care treatments, allowing HDHPs to pay for them them pre-deductible.
- You withdraw your HSA funds – with no taxes or penalties – to pay for qualified medical expenses.
- Through 2019, there was transitional relief for plans that covered male contraception before the deductible.
- Review of your HSA should be part of an annual financial check-up.
HSA contribution limits for 2019 and 2020
HSA regulations allow you to legally reduce federal income tax by depositing pre-tax money into a health savings account, as long as you’re covered by an HSA-qualified HDHP. Just like IRAs, HSA contributions can be made until April 15 of the following year (for 2019 contributions, this has been extended until July 15, 2020).
For 2019, you can deposit up to $3,500 if you have HDHP coverage for just yourself, or $7,000 if your HDHP covers at least one additional family member. You have until July 15, 2020, to contribute some or all of this amount (this is an extension of the normal April 15 deadline, due to the COVID-19 pandemic).
For 2020, people with self-only HDHP coverage can contribute up to $3,550 to an HSA, and those with family HDHP coverage can contribute up to $7,100 (“family” coverage just means that the HDHP covers at least one other family member; it does not have to cover an entire family).
Account holders who are 55 or older are allowed to deposit an additional $1,000 in catch-up contributions. (This amount is not adjusted for inflation; it’s always $1,000.) HSA contributions can be made throughout the year, or all at once – it’s up to the account holder.
There’s no minimum deposit, but whatever you put into your account is an “above-the-line” tax deduction that reduces your adjusted gross income. If you make your HSA contributions via your employer – as a payroll deduction – the money will be taken out of your check before taxes, so you’ll avoid both income tax and payroll tax on the contributions.
The health plan that pairs with an HSA
Because the HSA is paired with a high-deductible health plan, your health insurance premiums will often be lower than they would be on a more traditional plan with a lower deductible. But HSA-qualified plans vary considerably in their out-of-pocket exposure; deductibles on HSA-qualified plans in 2020 can be as low as $1,400 for an individual and $2,800 for a family. So you’ll find them among Bronze, Silver, and sometimes Gold plans, both on and off the exchange.
But since the maximum out-of-pocket limits on HSA-qualified plans are lower than the maximum allowable out-of-pocket limits on other plans (and the difference is growing with time), there will typically be some non-HSA-qualified plans (with higher out-of-pocket exposure) that have lower premiums than the available HSA-qualified plans. So while an HSA-qualified plan will typically be among the lower-priced plans available, it won’t necessarily be the lowest-cost plan available.
Prior to 2016, it was common to see HSA qualified plans that used aggregate family out-of-pocket limits. That meant the entire family out-of-pocket limit would need to be met before the plan’s benefits kicked in, even if all the claims were for a single family member. But since 2016, all health plans – including HDHPs – must embed individual out-of-pocket maximums, which means that no single family member’s out-of-pocket expenses can exceed the individual out-of-pocket limit established by the ACA, even if the family is enrolled in an HDHP with a higher family out-of-pocket limit. (And this becomes more important due to the aforementioned widening gap between the upper out-of-pocket limits allowed for all plans under the ACA, versus the limit allowed for HSA-qualified plans.)
It’s important to note that you can only contribute to an HSA if your current health insurance policy is an HSA-qualified high-deductible health plan (HDHP). Not all plans with high deductibles are HSA-qualified, so check with your employer or your health insurance carrier if you’re unsure. Contributions to your HSA can be made by you or by your employer, and they’re yours forever – there’s no “use it or lose it” provision with HSAs, and the money rolls over from one year to the next. HSA funds can be stored in a variety of savings vehicles, including bank accounts and brokerage accounts (ie, the funds can be invested in the stock market if you prefer that option and your HSA administrator allows it), and there are numerous HSA custodians/administrators from which to choose.
IRS expands preventive care umbrella to cover some chronic care treatments
The ACA requires all non-grandfathered health plans to cover preventive care before the deductible, and this provision applies to HDHPs as well. But under an HDHP, non-preventive services cannot be paid for by the health plan until the insured has met the deductible.
So HDHPs cannot have copays for office visits or prescriptions prior to the deductible being met, which is one of the ways they differ from other health plans that have high deductibles but are not HDHPs.
But under new guidelines that the IRS issued in mid-2019, the list of preventive services that can be covered pre-deductible on an HDHP has been expanded to include certain treatments for certain specific chronic conditions. It’s optional for insurers to classify these services as preventive, but if they do, the insurer can cover them (partially or in-full) before the enrollee meets the deductible, and the health plan will continue to have its HDHP status.
The conditions/treatments include:
- Congestive heart failure or coronary artery disease: ACE inhibitors and/or beta blockers
- Heart disease: Statins and LDL cholesterol testing
- Hypertension: Blood pressure monitor
- Diabetes: ACE inhibitors, insulin or other glucose-lowering agents, retinopathy screening, glucometer, hemoglobin A1c testing, and statins
- Asthma: Inhalers and peak flow meters
- Osteoporosis or osteopenia: Anti-resorptive therapy
- Liver disease or bleeding disorders: International Normalized Ratio (INR) testing
- Depression: Selective Serotonin Reuptake Inhibitors (SSRIs)
IRS allows HDHPs to pay for COVID-19 testing and treatment pre-deductible
With the exception of preventive care, HDHPs normally cannot pay for any medical services until the insured has met at least the minimum deductible set by the IRS. But in the face of the COVID-19 (coronavirus) pandemic, those rules have been relaxed. In March 2020, the IRS announced that HSA-qualified health plans would be allowed to pay for COVID-19 testing and treatment pre-deductible, without the health plan losing its HSA-qualified status.
The federal government and numerous states are requiring health plans to cover COVID-19 testing with no cost-sharing, which means the insured doesn’t have to pay anything for the service. These rules apply to HDHPs just like any other plan, so the IRS announcement was important in terms of clarifying that people with HDHPs would still be able to contribute to HSAs in 2020, despite the fact that their health plans are now required to pay for an additional service (that isn’t on the federally-defined list of preventive services) pre-deductible.
The federal government is not requiring health plans to cover COVID-19 treatment without cost-sharing, and neither are most states (New Mexico is, and Massachusetts is as long as the treatment is provided in a doctor’s office, urgent care clinic, or emergency room; state regulations don’t apply to self-insured health plans). So most HDHPs will likely continue to require members to meet their normal cost-sharing requirements if they end up needing COVID-19 treatment (as opposed to just testing). But if your HDHP does opt to suspend cost-sharing for COVID-19 treatment (or to partially cover it pre-deductible), your plan will continue to be an HDHP and you’ll still be able to contribute to an HSA for 2020.
CARES Act allows OTC medications and menstrual products to be purchased with HSA funds
As of 2011, the ACA prohibited the purchase of over-the-counter medications with HSA funds, unless a doctor wrote a prescription for them. But Section 4402 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act changed that. The law, which was enacted in March 2020, eliminated the sentence at the end of Section 223(d)(2) of the Internal Revenue Code of 1986 that had previously prohibited the purchase of non-prescription over-the-counter medications with HSA money (it used to say that qualified medical expenses “shall include an amount paid for medicine or a drug only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin.” That provision was eliminated under the CARES Act)
Section 4402 of the CARES Act also changed the rules to allow menstrual products to be purchased with HSA funds.
Both of these changes are permanent and are retroactively effective to January 1, 2020.
Using your HSA funds
You can use the tax-free savings in your HSA to pay for doctor visits, hospital costs, deductibles, co-pays, prescription drugs, or any other qualified medical expenses. Once the out-of-pocket maximum on your health insurance policy is met, your health insurance plan will pay for your remaining covered medical expenses that year, the same as any other health plan.
If you switch to a health insurance policy that’s not HSA-qualified, you’ll no longer be able to contribute to your HSA, but you’ll still be able to take money out of your HSA at any time in your life to pay for qualified medical expenses, with no taxes or penalties assessed. If you don’t use the money for medical expenses and still have funds available after age 65, you can withdraw them for non-medical purposes with no penalties, although income tax would be assessed at that point, with the HSA functioning much like a traditional IRA.
You can also withdraw tax-free money from your HSA to pay Medicare premiums (for Part A, if you have to pay premiums for it – although most people don’t – and for Parts B and D, but not for Medigap plans). Tax-free HSA funds can also be used to pay long-term care premiums. There are limits on how much you can withdraw tax-free from your HSA to pay long-term care insurance premiums. (These limits are for 2020; the IRS indexes them for inflation annually.) If your age is:
- 40 or younger, you can withdraw $430 tax-free to pay long-term care insurance premiums
- 41 to 50, you can withdraw $810
- 51 to 60, you can withdraw $1,630
- 61 to 70, you can withdraw $4,350
- 71 or older, you can withdraw $5,430
IRS provided transitional relief for HSA-qualified plans that cover vasectomies and condoms before the deductible
While male contraception is not considered preventive care under federal regulations (and thus coverage under a plan that covers male contraception before the deductible would make a person ineligible to contribute money to an HSA), the IRS did not enforce that provision until 2020. So in 2018 and 2019, if you were in a state that required all plans to cover male contraceptives before the deductible, you could still contribute to your HSA if you had a plan that would otherwise have been considered HSA-qualified.
Here’s the backstory on how this all works:
You can only contribute to an HSA while you’re covered by an HSA-qualified HDHP. If you drop your health insurance coverage or switch to a non-HDHP, you have to stop making HSA contributions.
One of the requirements for a plan to be an HSA-qualified HDHP is that the plan cannot pay for any services before the deductible, other than preventive care. Preventive care was defined by the IRS in Notice 2004-50, and that was revised in 2013 by Notice 2013-57, to clarify that any services deemed preventive care under the ACA (and thus required to be covered on all non-grandfathered plans with no cost-sharing) would be considered preventive care for HSA-qualified plans as well. That ensured that plans could be both ACA-compliant and HSA-qualified. (As noted above, it was further revised in 2019 to allow HSA-qualified plans to provide pre-deductible coverage for certain care for chronic conditions.)
But some states – including Illinois, Maryland, and Oregon – enacted laws requiring all state-regulated plans to cover FDA-approved contraceptives for men, before the deductible was met. Contraceptive coverage for women is considered preventive care under ACA regulations, so plans that cover female contraceptives before the deductible can still be HSA-qualified. But male contraceptives are not considered preventive care under federal regulations.
So if a state requires all state-regulated plans (ie, all plans that aren’t self-insured) to cover vasectomies and condoms at no cost — or in any form before the deductible is met — HSA-qualified plans in that state would cease to be HSA-qualified.
In Maryland, the law requiring plans to fully cover male contraception took effect in January 2018, and concerns arose quickly about the fact that people in Maryland with plans that were marketed as HSA-qualified would no longer be able to contribute to their HSAs, since their health plans were now providing pre-deductible benefits in excess of what the IRS considers preventive care. Maryland enacted legislation in April 2018 to exempt HSA-qualified plans from the law that requires plans to cover male contraception, but that wouldn’t help people who had already purchased HSA-qualified plans for 2018.
In response to the conundrum faced by people who wanted HSA-qualified coverage in states requiring male contraceptive coverage before the deductible, the IRS published Notice 2018-12. This notice clarifies that
- Male contraceptives are not considered preventive care under federal guidelines, so having a plan that covers them before the deductible would make a person ineligible to contribute to an HSA.
- The IRS is seeking comments on the preventive care rules for HDHPs, so it’s possible that IRS guidelines for allowable preventive care under an HSA-qualified plan could change in the future (but this has not happened as of 2020).
- Until the start of 2020, the IRS allowed people to contribute to an HSA even if their plan (which would otherwise be considered an HSA-qualified plan) covered male contraception before the deductible. This transitional relief also applied to plans that were issued before the IRS published Notice 2018-12, so a person who bought an otherwise-HSA-qualified plan for 2018 was allowed to make the full year HSA contribution for 2018.
The Illinois contraceptive mandate statute now also includes an exception for HDHPs [Sec 356z.4(4)], and several other states have followed suit, issuing requirements that state-regulated health plans cover male contraception, but with an exemption for HDHPs.
Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.