Editor’s note: To take advantage of the benefits of an HSA you first need to know if you’re eligible. Because it’s a vital first step, we’ve written a newer blog post: “HSA Eligibility Requirements: Discover if You’re Eligible.”
The value and benefits of an HSA are hard to pass up. Their short-term and long-term savings options create flexibility to enable the specific HSA strategy that works best for you. In order to take advantage of these opportunities, however, you must be eligible to set up a health savings account. Here are the requirements to determine your HSA eligibility.
Health Plan Requirements for HSA Eligibility
- In 2020 and 2021, your health insurance must have an annual minimum deductible of $1,400 for individuals and $2,800 for families.
- In 2020, the annual out-of-pocket maximum can’t be more than $6,900 for individuals and $13,800 for families. This definition only applies to in-network services. The minimum annual deductible and maximum out-of-pocket amounts are indexed annually for inflation and subject to change annually.
- In 2021, the annual out-of-pocket maximum can’t be more than $7,000 for individuals and $14,000 for families. This definition only applies to in-network services.
- The health insurance plan must be structured so that the individual/family pays the first costs of healthcare (including prescriptions) up to the deductible, before any insurance payments kick in. Preventative care is excluded from this definition.
- Family coverage is defined by having an insurance policy that covers the insured and at least one other person.
A plan which meets all of these requirements is known as a qualified high-deductible health plan. You may often see it referred to as an HDHP.
Personal Requirements for HSA Eligibility
- Before you can open an HSA, you must be covered by a qualifying High Deductible Health Plan.
- You can’t be concurrently enrolled in any other non-HSA qualified health insurance plan.
- You can’t have or use a general purpose Flexible Spending Account (FSA). However, you are allowed to have a limited-purpose FSA for dental, vision, and/or dependent care if your HDHP doesn’t cover those services.
- You can’t be claimed as a dependent on someone else’s tax return.
- You can’t be enrolled in Medicare (Part A and Part B) or Medicaid.
Each year as you make changes to your health coverage, you may no longer be HSA eligible. Bookmark this page to ensure that when your healthcare and lifestyle change, your HSA eligibility doesn’t. Understanding these HSA-eligibility requirements will ensure that you stay IRS-compliant and are able to take advantage of the extensive list of HSA benefits.
FAQ on HSA Eligibility
Q: If you are eligible to open an HSA, must you?
A: No, but the tax advantages of an HSA make it a very smart financial decision to open one.
Q: How long can you keep your HSA?
A: Forever, if you choose to do so. But you can no longer deposit money into the account if you switch to a non-HDHP medical insurance plan.
Q: Can all medical expenses be paid from a health savings account?
A: No. The IRS has a specific list of “qualified medical expenses” which include almost all “normal” medical procedures and prescription medications, as well as ordinary dental and vision services and accessories (such as dentures and eyeglasses).
Many types of medical accessories and equipment are also eligible, as long as they have been prescribed or suggested by a doctor or medical professional. However, over-the-counter medications can not be purchased with funds from an HSA (unless specifically prescribed), nor can equipment used for general wellness (like a humidifier). You’re also not allowed to pay insurance premiums with HSA funds.
Q: If you change from a high-deductible health plan to a non-HDHP plan, what happens to the money that’s already in your HSA?
A: You still own the account, so you can still use the money in it for qualified medical expenses, or keep the funds in the account to grow tax-free. However, you can no longer make any further HSA contribution to the account unless you switch back to a high-deductible qualifying plan.
Q: Do the same rules apply to an FSA or HRA account?
A: No, the accounts – and the rules that apply to them – are very different.
Flexible Savings Accounts (FSAs) are available to all employees (at the employer’s discretion), whether or not they have an HDHP health plan. The contribution limit is much lower, and you can only roll over $500 of your FSA funds from year-to year. However, you can spend the money on most over-the-counter medications and products, from antacids and sunscreen to band-aids and condoms. There are no earnings or investment possibilities with an FSA.
Health Reimbursement Arrangements (HRAs) are available to all employees (at the employer’s discretion), whether or not they have an HDHP health plan. Only employers contribute to the plan, contributions can be higher than with an HSA, and the employer/insurer decide whether any funds can be rolled over. The plan defines qualified medical expenses, and an HRA can be extremely flexible in that area. Some plans even allow employees to pay their health insurance premiums from their HRA.
If you need more help with health account decisions, check out our blog. We will make you a healthcare benefits expert in no time, without any hard work or studying.
Updated: January 21, 2020
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.