Understanding High Deductible Plans and Health Savings Accounts (HSAs)

With high deductibles and rising health care costs across the nation, more and more Americans are looking for ways to make their medical care more affordable. One method many Americans are turning to is opening a health savings account, also referred to as an HSA. HSAs are widely considered by financial experts to be one of the best savings options available to consumers.

If you’re considering enrolling in an HSA, you may be wondering — what does an HSA cover? Do I qualify for an HSA? If I meet HSA requirements, how can I open an account? In this guide, we’ll provide answers to all these questions and many more.

What Is an HSA?

A health savings account (HSA) is a savings account used with a high-deductible qualifying health insurance plan. This savings account is appealing to many consumers because money can be drawn from the account tax-free. Thus, consumers can use their pre-tax dollars to pay for their qualifying medical expenses. In California, you can enroll in a high deductible HSA if you have a compatible health plan.

What Are High Deductible Health Plans?

What is a high deductible plan? A high deductible health plan has an annual deductible that is higher than $1,400 for a health insurance plan with self-only coverage or $2,800 for a health insurance plan with family coverage.

Your annual out-of-pocket costs also cannot exceed $6,900 for a health plan with self-only coverage or $13,800 for a health plan with family coverage. These annual out-of-pocket costs include co-payments, deductibles, co-insurance and other costs, but don’t include insurance premiums.

Once you’ve paid your deductible, your insurance provider will begin covering your medical expenses. In exchange for covering all these up-front expenses yourself, you’ll pay a lower monthly premium for your health insurance plan.

What Are the Advantages of an HSA?

What are the benefits of a health savings account? If you enroll in an HSA, you can enjoy the following advantages:

• You can deduct all of your contributions to your HSA on your taxes.
• You can save money in both the short term and the long term.
• Your HSA contributions accrue interest and grow tax-free.
• You’ll pay a lower premium when you have a high deductible health insurance plan that is HSA-compatible.
• You won’t have to pay any taxes or penalties when you use money from your HSA to pay for any qualifying medical expenses.
• Your HSA funds roll over, so you won’t have to worry about a “use it or lose it” rule as you would with a Flexible Spending Account.

All of these advantages make HSAs an appealing savings option for many consumers.

Annual Contribution Limits for Health Savings Accounts

How much can be contributed to an HSA? Health savings accounts have annual contribution limits, which, as of 2024, are as follows:

• Self-only coverage: The annual contribution limit on deductions is $4,150.
• Family coverage: The annual contribution limit on deductions is $8,300.
• 55+ contributions: If you are over the age of 55, you can add an additional $1,000 to your contribution limit

If you make the maximum annual contribution to an HSA, you’ll need to stay on a health insurance plan that is HSA-compatible for a full 12 months. If you don’t stay on a qualifying, HSA-compatible health insurance plan for the entire 12 months, your contributions will be considered income and subjected to a penalty.

How Do I Fund the HSA?

There are many ways to fund a Covered California HSA, such as:

• One-time deposits: You can add money to your HSA as you please through checks, direct deposits and mobile payments. This can be helpful if you cannot regularly contribute to your account but may want to on occasions you have some extra money.
• Payroll deductions: For more regular deposits into your account, many people set up payroll deductions with their employer. This option takes a set amount or certain percentage out of your paycheck before you receive it and deposits it straight into your account.
• Post-tax deposits: Similarly to payroll deductions, you can also set up an automatic deposit system with your bank. You can choose to do so at regular intervals or contact your bank when you are ready to make a transfer.

Do I Lose Funds if They Are Not Spent?

HSAs are similar to Flexible Spending Accounts (FSA) and Health Reimbursement Arrangements (HRA) in some ways, except for losing funds. With FSAs and HRAs, you often have to use or lose the money in the account every year. With an HSA, the money rolls over from year to year, even if you change jobs or health insurance plans. So, you can build up your contributions to cover essential services later on. Some people even consider it part of their retirement planning.

How Can HSA Funds Be Used?

Most of the time, you can use your HSA funds on medical-related expenses health insurance may or may not cover. However, under the scope of medical expenses, they can cover nearly anything, including:

• Everyday medical expenses: This might include medications, ambulance rides, medical supplies like crutches and hearing aids, surgery, vaccinations, medical tests and lab fees.
• Dental coverage: Even though dental care is often not included in insurance plans, you can use your HSA to cover regular cleanings, orthodontic work, exams, x-rays and copays.
• Vision expenses: Like dental, vision services are another special type of insurance coverage that can be assisted through HSA funds. Items like eye exams, laser eye surgery, eye drops, prescription glasses and contacts usually qualify for HSA payments.
• Substance abuse treatment/rehab centers: If you need help covering addiction treatment services, your California health savings account may be able to help.

There is one situation where such HSA limitations do not apply. Once you turn 65, you are able to use the money in your account however you please, so you can see why some people save up their funds as part of retirement planning. Note that the funds count as income on your taxes if you spend them on anything other than qualified medical expenses.

Types of HSA Contributions

What are the types of contributions you can make to an HSA? Contributions to an HSA include regular contributions, catch-up contributions and excess contributions:

• Regular contributions: These contributions refer to the maximum amount of contributions you can make each year. This contribution limit depends on what type of high deductible health plan you have, your age, the date you became eligible for an HSA and the date you became an ineligible individual, if applicable.
• Excess contributions: If you deposit more than the maximum limit by accident, you may withdraw this excess amount and the earnings from this amount before the tax filing date. If you do not withdraw this excess amount in time, you’ll have to pay an excise tax.
• Catch-up contributions: If you are eligible and 55 years of age or older, you can exceed your contribution limit by up to $1,000 for the year — this is known as a catch-up contribution.

You can make contributions to your HSA at any point in the calendar year until the tax filing date in the following year.

An HSA can be a great savings option for someone who has a high deductible health insurance plan and wants to give their savings for health care expenses a chance to grow tax-free.

Who Is Eligible?

What are the qualifications for an HSA? Consumers will need to meet the following eligibility requirements in order to open HSAs in California:

1. You Must Have a Qualifying Health Insurance Plan

Your health insurance plan must qualify as a high deductible plan and meet HSA requirements. Until you’re enrolled in a qualifying health plan, you cannot enroll in a health savings account.

2. You’re Not Covered by a Non-Qualifying Health Plan

If you are covered under a spouse’s health insurance plan that does not have a high deductible, then you may not be able to enroll in an HSA. However, there are a few exceptions if you’re covered on a health plan that has limited coverage like vision or dental.

3. You Cannot Have Medicare

If you are enrolled in Medicare, you can’t open a health savings account. Medicare is not considered a qualifying health insurance plan, as the purpose of an HSA is to help you cover costs you must pay with a high deductible plan. If you already have an HSA account when you enroll in Medicare, you can keep you HSA, but you cannot make more contributions.

4. You Cannot Have an HSA If You’re a Dependent

If you’re claimed as a dependent on someone else’s tax return, then you cannot open a health savings account. While you can still purchase a health insurance plan that is HSA-compatible, you cannot fund your high deductible with an HSA account.

To enroll in an HSA, you’ll need to meet the above HSA eligibility requirements.

What if you are eligible for an HSA and open an account, but later become ineligible? In this case, you can keep the money in your health savings account and continue to use the funds for qualifying medical costs. However, you won’t be able to make additional contributions while you’re ineligible.

How to Enroll in an HSA

Are you a California resident interested in opening an HSA? If so, follow these steps to learn how to open an HSA in California:

1. Purchase a High Deductible HSA-Compatible Health Plan

You can either enroll in a high deductible health insurance plan offered by your employer or purchase a health plan on your own if your employer doesn’t offer a plan or if you’re self-employed.

2. Find an IRS-Approved Entity

After you’ve confirmed you are eligible for a health savings account, you’ll need to open an account with an insurance company, bank or another entity approved by the IRS.

If you enroll in an HSA through your employer, you may be able to get advice from the human resources department about enrolling in an HSA. If HR cannot help you, you can instead contact your health insurance provider for help in setting up your HSA. On the other hand, you may decide to instead ask your bank if it offers health savings accounts.

Wherever you choose to open an HSA, the institution must be IRS-approved. You can’t open an ordinary savings account and simply label it as a health savings account or open an IRA and call it an HSA.

3. Complete an Application and Fund Your HSA

After selecting the IRS-approved entity in which you’ll open an HSA, the rest of the enrollment process is quite simple. You’ll fill out an application and then fund your account, after which you can start using these funds for any qualifying medical expenses.

How Can You Use Your Plan?

How can you use an HSA-compatible health insurance plan? Depending on your health plan, you can use your HSA funds to cover qualified medical expenses that you, your dependents or your spouse incur.

Pay for Qualifying Medical Expenses With Your HSA Debit Card or Checks

Many HSAs issue debit cards to account holders that they can use to cover prescription medications and eligible medical expenses. If you wait for a bill to be mailed to you, you can call and pay for the bill with your debit card. You can also use HSA checks to spend your funds.

Eligible Medical Expenses

What medical expenses can you pay for with your HSA funds? The following are examples of eligible medical expenses that you can pay for with the money you withdraw from your HSA:

• Dental treatment: This includes costs for teeth cleaning, fluoride treatments, fillings, dental x-rays, dentures and preventive treatment of dental disease.
• Eyewear: This includes contact lenses and eyeglasses.
• Lodging for outpatient care: Do you need outpatient care? You can use your HSA to pay for your lodging away from home.
• Acupuncture: If you pay for acupuncture, this health care service is included in your deductible medical expenses.
• Abdominal supports: You can use your HSA to cover abdominal supports.
• Treatment for alcoholism: Qualifying expenses include what you pay for inpatient treatment at a facility for alcohol addiction therapy, including your lodging, meals and transportation to and from AA meetings.
• Abortion: You can use you your HSA to cover a legal abortion.
• Chiropractor: If you need to pay for a chiropractor for health care, you can use your HSA funds to cover this expense.
• Air conditioner: If you have difficulty breathing, you can use your HSA funds to cover an air conditioner that can provide you with relief.
• Birth control pills: If you’re prescribed birth control pills by your doctor, you can include the costs for these pills as a qualifying expense.
• Ambulance: If you need to pay for service from an ambulance, this can be considered a qualifying expense.
• Breast pumps: Included in the qualifying medical expenses is the cost of breast pumps and lactation assistance supplies.
• Arch supports: Another medical expense that may qualify is for arch supports.
• Surgery for breast reconstruction: After a mastectomy due to breast cancer, qualifying expenses include breast reconstruction surgery and breast prosthesis.
• Autoette: This is covered when you use it for relief when sick.
• Contraceptive devices: When prescribed, contraceptive devices are a covered medical expense.
• Therapy for drug addiction: Included in eligible medical expenses are costs related to therapy for drug addiction, such as inpatient treatment, lodging and meals.
• Artificial limbs: Your HSA can cover artificial limbs.
• Convalescent home: This is covered only when used for medical treatment.
• Organ transplant: This medical service includes the donor’s expenses.
• Crutches: If you rent or buy crutches, this will be a covered medical expense.
• Prescription drugs: Drugs that are prescribed by a doctor are a covered medical expense.
• Hearing aids: If you need hearing aids, these can be purchased with HSA funds, along with batteries, maintenance and repairs need to successfully operate the hearing aids.
• Elastic hosiery: When prescribed by a doctor, this is considered a covered expense.
• FICA tax: Paying this tax for health care service is covered.
• Fees that are paid to a health institute: If your physician has prescribed that you receive medical service from a health institute, these expenses can be paid with your HSA funds.
• FUTA tax: This is a covered tax for health care service.
• Nursing: These costs include meals and board.
• Guide dog or another service animal: If you’re hearing disabled, visually impaired or have another physical disability, you may want to have a service animal to assist you. Related costs for a service animal that can be covered by HSA funds include purchasing, training and maintaining a guide dog or another service animal. Maintaining costs include food, veterinary care and grooming.

If you accidentally use your HSA funds to make a non-eligible purchase, you will need to report this purchase on your income tax return. You’ll also need to pay a penalty along with taxes on this purchase.

You can use a health savings account to cover various health care expenses, which is why this savings account is such an appealing option for those with high deductible health insurance plans.

See If You Qualify for an HSA Plan

At Health for California, we can help you find the right HSA-compatible health insurance plan in California. We’ll provide you with comprehensive quotes that will allow you to compare different plans and coverage options. Request a quote from us at Health for California today.