How Can You Contribute to an HSA?

Many Americans are creating Health Savings Accounts (HSAs) to save money for healthcare costs. Your employer may offer a Qualified High Deductible Health Plan (QHDHP) in your benefits package. You may also have the option to utilize an HSA as a self-employed freelancer. You can use the funds from this savings account to fill in gaps in your healthcare plan and receive the health services you need. If you're considering opening an HSA, you'll first want to determine whether this savings account is right for you.

Learn More About HSAs

Many employees have questions about HSAs. Are employer HSA contributions taxable? Can you set up an HSA direct deposit? Simply put, you'll want to consider many things before opening an HSA. Throughout this article, we'll cover everything from what an HSA is to who can open one and how to go about contributing to the account.

What Is an HSA?

With a personal savings account known as a Health Savings Account (HSA), you can save your pre-tax dollars for future or current healthcare expenses. You can use these funds for your own healthcare expenses or your dependents' healthcare costs, unless the dependents are on other coverage that is not also a QHDHP plan, even if your employer's health insurance plan doesn't cover them. An HSA covers out-of-pocket, health-related expenses not covered by your high deductible health plan (HDHP). These costs include deductibles, copayments, prescriptions, and coinsurance. 

Since your contributions to an HSA are tax-deductible, an HSA can potentially save you money and lower your taxable income. An HSA is also the only investment vehicle featuring Triple Tax Savings.  Monies going in, investment gains and monies used for qualified expenses are all tax-free. Opening an HSA through your employer is similar to the process of opening a 401(k) plan. To build your ideal HSA portfolio, you can choose from various investment funds. Your employer can take HSA contributions out of your paycheck before paying you. They also may match a percentage of what you contribute to your HSA. 

HSAs can take different forms. You can typically select the percentage of income you want your employer to remove from your paycheck. This ability makes HSAs very convenient. Your HSA money will move into the account automatically without you needing to remember to move it. 

You can go through your employer to open an HSA, or you may be able to open one as an individual if you are self-employed. Whether you make HSA contributions via an employer or individually, you will likely receive a medical debit card, such as the Difference Card. This card will link to the balance in your HSA. 

You can open an individual HSA with your bank or financial institution. This option can also come with more options for funding than employer HSAs. In this case, you will be the only one contributing to the savings account. This aspect could mean fewer savings and less convenience than you would get with an HSA through your employer. Rather than pre-tax HSA payroll contributions, you'll take your deduction when you file your taxes. 

Who Can Open an HSA?

The federal government oversees HSAs. They develop and enforce the guidelines regarding who is eligible for these savings accounts. Your health insurance plan links to your HSA eligibility. You can open an HSA if enrolled in an HSA-eligible QHDHP.

HDHPs are health insurance plans with relatively low premiums and high deductibles. If you want to open an HSA, your health plan must meet the federal guidelines regarding the minimum deductible and maximum out-of-pocket threshold. For 2022, the minimum annual deductible for self-only coverage is $1,400 or $2,800 for family coverage. The maximum annual out-of-pocket expenses and deductible for self-only coverage are $7,050 for an individual or $14,100 for family coverage. If your HDHP meets these requirements, you are likely eligible for HSA enrollment.

Along with having a QHDHP, a few other factors could affect your eligibility for HSA enrollment:

• You are not enrolled in TRICARE.
• No one claims you as a dependent.
• You are not enrolled in Medicare.
• You do not use military benefits from the VA.
• You are not covered by another health plan beyond your QHDHP, such as your spouse's health insurance.
• You do not have a disqualifying alternative medical savings account like a Flexible Spending Account (FSA) or a Health Reimbursement Account (HRA). You can hold a Limited Purpose FSA, however.

Please note HSAs are only available for adults. You cannot open a standalone HSA for your child if you claim them as a dependent. Your spouse, however, can have an HSA if they meet the eligibility requirements.

Why Choose an HSA?

If you have a QHDHP, an HSA can offer you several benefits, such as:

Tax savings: You can decrease your taxable income by making contributions to your HSA with pre-tax dollars. This point is one of the most attractive features of an HSA because it means you may pay less in taxes.

Access to the funds: The money in your HSA is yours, unlike other healthcare spending plans, such as FSAs, DCAs or LPFSAs. The money is yours to decide when and how to spend or save. If you open an HSA through your employer, you can keep the account when you change jobs or purchase a different HDHP.

Tax-free interest: Money in your HSA earns interest tax-free. You can use your funds for future or current healthcare needs or even retirement while your money grows. If you meet certain criteria, you may even be able to put some of your HSA funds in stocks, bonds and mutual funds.

Retirement savings: The funds in your HSA won't expire, so you can use your money for retirement once you hit retirement age. At age 65, you can use the funds in your account for whatever expenses you want without penalty.

Medical expense savings: An HSA can help you save on qualifying medical expenses. Rather than use your taxable income to pay for your healthcare expenses, you can use tax-free dollars in your HSA to cover your coinsurance, copays and deductible costs. You can use these funds to cover expenses health insurance typically doesn't, such as orthodontia, contacts and eyeglasses. Save money in the long run by covering these expenses with tax-free dollars.

Can I Deduct HSA Contributions?

Direct deposits to your HSA can be deducted from your taxes. However, employer contributions have already been excluded from your income, which means you can't take an additional deduction for them. If you use your HSA to cover your healthcare expenses, you don't have to itemize medical deductions for these costs.

If you have enough healthcare expenses that you did not pay with your HSA, however, you may be able to claim these costs during tax season as an itemized deduction. Your deductible expenses should be a certain percentage of your adjusted gross income (AGI) if you want to itemize. Since your HSA contributions lower your AGI, it can be easier to pass this threshold.

At the time of your contribution, the deposited money is not subjected to federal income tax. The funds in your HSA will also accumulate year over year if you don't spend the money. Other tax benefits that come from having an HSA include:

• Tax-free earnings.
• Tax-free distributions used for qualifying medical expenses.
• Exclusion of employer contributions from your gross income.
• Eligibility for a tax deduction for your additional HSA contributions.
• Exclusion of HSA contributions made through payroll deductions from your gross income.

If you open an HSA through your employer, they will handle the paperwork for your taxes. On the other hand, if you open the HSA on your own, you'll take the tax deduction when you file your taxes.

How to Contribute to an HSA

When you open an HSA, you can contribute tax-free dollars to the account. Both you and your employer can contribute to your HSA. However, if you don't have an employer or an employer-sponsored health insurance plan, you may still be able to open and contribute to an HSA.

Can I Contribute to an HSA on My Own?

You do not have to be an employee to contribute to an HSA, meaning you can set up and contribute to an HSA independently. Though these HSAs tend to come with restrictions, you can still create one. Rather than contribute funds from an employer, you can contribute money from other sources to your HSA. These other sources may include personal savings, dividends income and unemployment income.

How Much to Contribute to an HSA

HSAs don't have income limits, but there are contribution limits. As of 2022, the HSA contribution limit for both employee and employer contributions is $3,650 for self-only and $7,300 for family. Those age 55 or older can also make HSA catch-up contributions of $1,000. The HDHP maximum out-of-pocket for copays, deductibles and other amounts is $7,050 for self-only and $14,100 for family. 

Ways to Contribute to Your HSA

There are a few ways you can contribute to your HSA, such as recurring direct deposits or one-time deposits.

• Recurring direct deposit from paycheck: One of the most popular ways employers contribute to their employees' HSAs is via a recurring direct deposit from their paycheck. This type of contribution occurs before taxes are taken from your paycheck. If you want to set up this type of contribution, you can work with the benefits administrator at your employer.
• Recurring monthly deposit: Additionally, you can set up a recurring monthly deposit from your personal bank account. Select your desired amount and date for the deposit to go to your HSA every month. This arrangement is an example of an HSA after-tax contribution.
• One-time deposit: You can also make a one-time deposit into your HSA account from your personal bank account. By authorizing a withdrawal from your checking or savings account, you can contribute to your HSA anytime. This method is another example of an HSA after-tax contribution.
• HSA contributions after retirement: HSA eligibility is not based on employment. Even after you retire, you can continue contributing to your HSA as long as you have a QHDHP and are not enrolled in Medicare. Healthcare expenses tend to be high as you age and you won't have to pay income tax on your HSA money as long as you use it for qualified medical expenses.

How Can HSA Money Be Used?

If you are interested in opening an HSA, you should first understand how you can use the funds in this account. HSAs cover many healthcare expenses that a high-deductible healthcare plan doesn't, which is why this savings account appeals to so many Americans. You can withdraw funds from your HSA without incurring federal taxes as long as you or your dependent has a qualifying medical expense. Some common healthcare expenses that your HSA may cover include:

• Prescriptions: An HSA may cover insulin and medication prescribed by your doctor.
• Health insurance costs: You can use your HSA funds to cover health insurance expenses like coinsurance, copayments and deductibles. Remember that you typically cannot use HSA funds to pay your premium.
• Dental and vision care: Health insurance plans don't always cover dental and vision care. Many HSA holders use the funds from their accounts to pay for dental and vision expenses, such as root canals, glasses and contacts. 
• Drug addiction treatment: With an HSA, you can cover the costs associated with addiction treatment and recovery, such as inpatient treatment.
• Feminine hygiene products: You can use your HSA balance to pay for feminine hygiene products like tampons and pads.
• Complementary treatments: If you require complementary treatment to assist with your overall wellness — like chiropractic care or massages — you may be able to use your HSA to cover these expenses.
• Over-the-counter medication: You can use your HSA to buy several over-the-counter drugs. These might be cold medicine, allergy medicine, pain relievers, personal protective equipment (PPE) and sunscreen.
• Maternity and fertility services: You may be able to use the funds from your HSA to cover maternity services and fertility enhancement expenses. These might include breast pumps, breast milk storage bags, in vitro fertilization and surgery.
• First-aid and health monitoring supplies: HSAs can also cover many first-aid and health monitoring supplies, including bandages, glucometers, pressure cuffs and compression socks.

You cannot put your HSA funds toward over-the-counter items like cosmetics and toothpaste. Cosmetic surgeries and vacations to healthier climates are also considered ineligible expenses.

Learn More About HSAs With The Difference Card

Since 2001, The Difference Card has saved clients an average of 18% on their annual health insurance costs. With $1 billion in savings and counting, we offer a health insurance solution that helps you get more from your medical plan. When you reduce your out-of-pocket healthcare expenses, you can increase your overall wellness, medically and financially.

Our Difference Card HSA includes a Triple Tax Advantage, meaning the money you invest, the interest you earn and the funds used for qualified distributions are all tax-free. Contact The Difference Card to learn more about our Difference Card HSA offering.