Health Savings Accounts Explained: How Would They Work

Health Savings Accounts are a type of savings account that allows you to set aside money on a tax-free basis to pay for medical expenses.

You can contribute to a Health Savings Account (HSA) if you have a High-Deductible Health Plan (HDHP), which means you pay a higher deductible before your insurance kicks in.

HSAs are designed to help you save for medical expenses, and the money in your account grows tax-free over time.

To contribute to an HSA, you can put in up to $3,500 of your own money each year, or $7,000 if you have a family plan.

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A health savings account, or HSA, is a tax-advantaged medical savings account you can contribute to and draw money from to pay for certain medical expenses tax-free.

Contributions to an HSA are limited to a certain amount each year, and if you contribute more than that, you'll have to count the extra amount as taxable income and pay a 6% penalty.

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You can use an HSA to pay for out-of-pocket medical, prescription drug, dental, and vision expenses.

If you have money left over in a TexFlex health care FSA at the end of the plan year, you can roll it into a TexFlex limited-purpose FSA for qualified vision and dental expenses, but only if you're participating in Consumer Directed HealthSelect.

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To be eligible for a Health Savings Account (HSA), you must be enrolled in a high-deductible health plan (HDHP) like Consumer Directed HealthSelect.

You must not be enrolled in Medicare, and you can't have any other non-HDHP coverage that provides benefits covered by your HDHP, except for vision or dental coverage.

You also can't be claimed as a dependent on someone else's tax return, receive benefits under TRICARE or TRICARE for Life, or have a health care flexible spending account (FSA) in the same plan year.

Here are some common reasons you might not be eligible for an HSA:

To enroll in an HSA, you must be enrolled in a high-deductible health plan (HDHP) like Consumer Directed HealthSelect. You also can't be enrolled in Medicare.

You can't enroll in an HSA if you're covered by any other non-HDHP plan that provides benefits covered by your HDHP. This includes plans like a spouse's plan, but exceptions include coverage like vision or dental.

You're also not eligible if you're claimed as a dependent on someone else's tax return. This means if you're a dependent, you can't enroll in an HSA or make contributions to one.

Receiving benefits under TRICARE or TRICARE for Life also makes you ineligible for an HSA. And, if you have a health care flexible spending account (health care FSA) in the same plan year, you can't enroll in an HSA or make contributions to one.

Here are some scenarios that make you ineligible for an HSA:

You can open a Health Savings Account (HSA) if you have a high-deductible health plan. To get started, you can look into HSAs offered by brokerages or banks such as Fidelity, HealthEquity, or Lively.

Researching your options carefully is key to ensure you get the best HSA to suit your needs.

Contributions to an HSA can come from anyone, including your employer, who can make pre-tax contributions. Your employer's contributions are a great perk, but be aware that making additional after-tax contributions may forfeit any employer contributions.

Anyone, including family members, can contribute to an HSA on your behalf, and these contributions are deductible by you on your tax return. This means you can also contribute to your HSA through your payroll, either through a pre-tax deduction or a post-tax deduction.

You can arrange a pre-tax paycheck deduction through your payroll office, making it easy to contribute to your HSA on a regular basis.

Anyone can contribute money to your HSA, including your employer. Your employer can make pre-tax contributions to your HSA.

You can also choose to contribute tax-free dollars through your payroll. Any others who choose to contribute to your account would do so on an after-tax basis, although you would be able to deduct the contribution from your gross income on your tax return.

If you make additional after-tax contributions and have met the contribution limit, you may forfeit any HSA employer contributions via your payroll deduction.

You can arrange a pre-tax paycheck deduction to contribute additional money to your HSA through your payroll office. This is a convenient way to save for qualified medical expenses.

Anyone can contribute money to your HSA, including your employer, and you can choose to contribute tax-free dollars through your payroll. Your employer can make pre-tax contributions to your HSA, and you can also contribute through payroll deduction.

To contribute through payroll deduction, you'll need to arrange it through your payroll office when you complete the HSA enrollment process. You can choose a pre-tax paycheck deduction amount, which is a great way to make consistent contributions to your HSA.

If you make additional after-tax contributions and have met the contribution limit, you may forfeit any HSA employer contributions via your payroll deduction. So, be sure to check the contribution limits before making after-tax contributions.

Here are the details on who can contribute to your HSA through payroll deduction:

Remember, contributions made to an HSA by a family member on behalf of an eligible individual are deductible by the eligible individual in computing adjusted gross income.

You can fund your HSA all at once or throughout the year.

To avoid incurring a penalty, you'll need to fill out an Excess Contribution and Deposit Correction Request Form, which is available on the Optum Bank website.

If you have less than $25 left in your TexFlex health care FSA after August 31, you can roll that money into a TexFlex limited-purpose FSA.

You'll have to set up the FSA and transfer the money yourself, as ERS won't do it for you.

If you have more than the IRS-imposed maximum carryover amount left in your TexFlex health care FSA after August 31, you'll forfeit any amount over the carryover maximum.

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Managing your HSA is a straightforward process. You own your HSA, so your balances will carry over from one year to the next.

You can take your account with you if you change health plans or get another job. However, if you leave state employment, you'll be responsible for paying the monthly administrative fee on your HSA, which will be deducted from your remaining balance each month.

You're free to select any HSA custodian you like, but if you're enrolling in an HSA through your employer, you may need to use the HSA custodian that your employer selects to have your pre-tax contributions payroll deducted and to receive any contributions that your employer makes on your behalf.

Here are some popular options for HSA custodians:

Once your HSA savings reach more than $2,000, you can decide how to invest any funds over $2,000. Investment earnings and interest aren't taxed, but keep in mind that invested funds can lose value.

Checking your HSA balance is a straightforward process. You can log into your online Optum Bank account at www.optumbank.com to view your balance 24/7.

You can also use the Optum Bank app to check your balance on the go. This is convenient for tracking your funds and staying on top of your account.

Funds are available once they're deposited in your HSA, so you can't spend before they're actually in the account, or you might incur a fee for insufficient funds.

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You'll get a UnitedHealthcare Health Savings Account Debit MasterCard by Optum Bank after opening your HSA, which you can use to pay for qualified medical expenses at any time.

You can request additional debit cards for your dependents at no cost, and you can also request checks at no cost.

The funds in your HSA belong to you, so you can take your account with you if you leave state employment and continue to use the funds, even if you're enrolled in a different health plan.

As long as you're enrolled in a qualified HDHP, you can continue to make tax-free contributions to your HSA, and your balances will carry over from one year to the next.

If you leave state employment, you'll be responsible for paying the monthly administrative fee on your HSA, which will be deducted from your remaining balance each month.

You can decide how to invest the funds in your HSA, but only once your savings reach more than $2,000. Optum Bank offers a variety of investment options, and investment earnings and interest aren't taxed.

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It's essential to keep in mind that invested funds can lose value. The IRS allows you to invest your HSA funds, but it's crucial to be aware of the potential risks.

You can choose from a range of investment options, including stocks, bonds, and funds, with low trading fees. However, some HSA custodians may have limited choices, be more expensive, and have hidden fees.

To make an informed decision, shop around and compare the fees and investment options offered by different HSA custodians. You can use tools like HSA Search to find and compare the fees charged by various HSA custodians.

You can use your HSA funds to pay for a wide range of qualified medical expenses, including deductibles, copayments, coinsurance, vision and dental care, and other out-of-pocket medical costs.

HSA-eligible expenses are broad, and you can use your HSA to pay for COVID tests, over-the-counter medications, acupuncture, chiropractor services, and various other complementary medicine services.

You can even use your HSA funds to pay for menstrual products, thanks to the CARES Act.

Some medical expenses that can be paid from your HSA funds include doctor's appointments, prescriptions, and over-the-counter medications.

However, there are some exceptions to what you can pay for with your HSA funds. You cannot use your HSA funds to pay for your monthly premium, unless you're on Medicare or using your HSA for healthcare continuation coverage while on unemployment compensation.

You can use your HSA funds to pay for long-term care insurance, subject to certain limits.

It's essential to keep track of your HSA-qualified expenses, as you'll need to ensure that HSA funds are used for qualified medical expenses.

Contributions made to an HSA can be rolled over to the following year, allowing you to keep your account even if you change jobs.

Unused contributions are vested, meaning they remain in your account until you use them.

An HSA is portable, so you can take it with you if you switch jobs.

You can also transfer your HSA to a surviving spouse tax-free upon your death.

However, if the beneficiary is not your spouse, they'll be taxed on the account's fair market value, minus any qualified medical expenses paid from the account within a year of your passing.

You cannot use HSA funds to pay for your monthly premium, except in certain situations like paying Medicare premiums or COBRA while on unemployment compensation.

Contributions to an HSA can be rolled over to the following year if not used, allowing you to save for future medical expenses.

You can keep your HSA even if you change jobs, making it a portable and convenient option.

An HSA can be transferred to a surviving spouse tax-free, providing peace of mind for families.

However, if the beneficiary is not a spouse, the account is no longer treated as an HSA, and the beneficiary will be taxed on the account's fair market value.

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To contribute to an HSA, you must have a high-deductible plan, which can be a challenge for those with lower insurance premiums or limited financial means.

Funding your HSA requires setting aside a substantial portion of your HDHP's deductible amount, which can be difficult for those without extra cash.

HSAs come with regulatory filing requirements, including reporting contributions, withdrawals, and distributions, which can be a record-keeping burden.

Using HSA funds for non-qualified expenses can result in federal tax penalties.

It's essential to keep receipts of your HSA spending, as it's an IRS requirement. Optum Bank offers an online receipt vault to help you manage your receipts.

You'll need to pay taxes on HSA funds used for non-medical expenses after enrolling in Medicare.

If you're under 65 and still contributing to your HSA, you'll need to stop contributing once you enroll in Medicare.

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HSAs have some great benefits, but also some drawbacks to consider. One of the main advantages is the tax savings. Employer and individual contributions by payroll deduction to an HSA are excluded from the employee’s taxable income, and individual direct contributions are 100% tax deductible from the employee’s income.

The tax savings don't stop there. Earnings in the account are also tax-free. You can also invest the money in your HSA in stocks and other securities, potentially allowing for higher returns over time.

However, excess contributions to an HSA incur a 6% tax and are not tax deductible. This is something to keep in mind when managing your HSA.

Here are some of the key advantages and disadvantages of HSAs:

You'll need to report your HSA contributions and withdrawals on your tax return. Contributions to your HSA are tax-deductible and can be claimed as an adjustment to income on your tax return.

As a general rule, you can use your HSA funds to pay for qualified medical expenses, including copays, prescriptions, and medical equipment. This means you can use your HSA to cover expenses not covered by your health insurance plan.

You'll need to keep receipts for all medical expenses paid with HSA funds, as you'll need to report these on your tax return. This can be a hassle, but it's worth it to avoid penalties and taxes on non-qualified withdrawals.

HSAs are not subject to income tax or penalties for qualified medical expenses, making them a great way to save for healthcare costs in retirement.

You can contribute to an HSA on a flexible basis, whereas FSAs have a fixed contribution amount.

One of the biggest advantages of HSAs is that your balances will carry over from one year to the next, so you don't lose any unused funds.

Here are some key differences between HSAs and FSAs when it comes to portability:

If you leave your employer, you can take your HSA with you, but you'll be responsible for paying the monthly administrative fee if you're in state employment.

You own your HSA, so your balances will carry over from one year to the next. This is a big advantage over FSAs, which have a fixed contribution amount and don't allow unused funds to roll over.

The maximum contribution for an FSA for the 2024 tax year is $3,200, but HSA contributions can be flexible.

One key difference between HSAs and FSAs is that unused funds in an FSA are forfeited once the year ends. This isn't the case with HSAs, where you can take your account with you if you change health plans or even get another job.

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If you leave state employment, you will be responsible for paying the monthly administrative fee on your HSA, which will be deducted from your remaining balance each month.

Here's a comparison of FSAs and HSAs in terms of portability and rollover options:

One of the most significant advantages of HSAs is the tax benefits they offer. Contributions to an HSA are excluded from the employee's taxable income.

Employer and individual contributions by payroll deduction to an HSA are 100% tax-exempt, and individual direct contributions are 100% tax deductible from the employee's income. Earnings in the account are also tax-free.

Excess contributions to an HSA incur a 6% tax and are not tax deductible, so it's essential to keep track of your contributions.

To ensure the security of Health Savings Accounts (HSAs), employers can designate a third-party administrator or a bank to manage the accounts. This helps prevent unauthorized access and ensures accurate record-keeping.

Employers can also set up automatic contributions to employees' HSAs, making it easier for employees to save for medical expenses. This can be done through payroll deductions.

Employers can also establish a plan document that outlines the rules and procedures for the HSA, including how contributions will be made and how withdrawals will be handled. This helps employees understand their responsibilities and how to use their HSA effectively.

You're probably wondering if others can access your HSA information, and the answer is yes, but with some limitations. You can accept contributions from family members or others, as long as you're enrolled in a qualified HDHP.

For example, a family member could deposit money to your HSA to help pay for a procedure. It's up to you to ensure the total amount deposited throughout the year doesn't exceed the IRS' annual maximum.

Optum Bank administers the Consumer Directed HealthSelect HSAs.

You'll need to open your HSA through Optum Bank's site, which can be accessed through your online ERS account.

ERS, your benefits coordinator, Optum Bank or Blue Cross and Blue Shield of Texas will not open your account for you.

The State of Texas will make contributions only to Optum Bank HSAs.

It's essential to open your Optum Bank HSA as soon as possible to start receiving the state's contribution and to use your HSA funds for qualified medical expenses after your account has been opened.

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