A health savings account (HSA) is a type of savings account that lets individuals put aside pretax money to pay for qualified health care expenses. Studies show that HSA asset growth has been steadily rising since 2016. However, HSAs are often underutilized by employees because they either do not understand how HSAs work or they have misconceptions about them.
Below are eight of the most common misconceptions about HSAs. If you’re an employer and offer an HSA, be sure to educate your employees about how these little-known tools work and how they can help.
1. Myth: You must go through your employer to get an HSA.
Fact: You can open an HSA on your own if your employer does not provide one as long as you have a qualified high-deductible health plan (HDHP) and meet the other eligibility requirements.
2. Myth: You do not get any tax benefits if you buy the HSA on your own.
Fact: If you received the HSA through your employer, your contributions are exempt from federal income tax, Social Security tax and Medicare tax withholding. If you purchased the HSA on your own, you can claim a tax deduction for your HSA contributions.
3. Myth: HSA funds can only be used for hospital stays.
Fact: HSA funds can be used for both qualified hospital and non-hospital bills, including:
- Deductibles.
- Copayments and coinsurance.
- Medical, dental and vision care expenses.
- Prescription drugs.
- Long-term care expenses.
- Health care treatments and supplies not covered by an HDHP.
4. Myth: Your employer has full control of your HSA.
Fact: If you obtained an HDHP through your employer, the plan may require that you open your HSA with a provider of your employer’s choosing. Thereafter, you can switch your HSA provider to a different one (of your own choosing), even while working for your employer. You can also take your HSA with you when you leave your employer.
5. Myth: You must use all of your HSA funds by the end of each year.
Fact: HSAs do not have a “use it or lose it” rule, which means you can use the money to pay for qualified expenses whenever you want.
6. Myth: You must get authorization to withdraw your HSA funds.
Fact: You can withdraw your HSA funds at any time without having to first get permission from your HSA administrator. But if you’re under age 65 and you use your HSA funds to pay for nonqualified expenses, you will have to pay taxes on the amount you withdrew, and the IRS will charge you a 20% withdrawal penalty.
7. Myth: You will lose your existing HSA funds if you enroll in Medicare.
Fact: Once you enroll in Medicare, you will not be able to make any new pretax contributions to your HSA. However, you can keep using and withdrawing the funds that are currently in your HSA.
8. Myth: You cannot invest your HSA funds.
Fact: Most HSAs allow you to invest your HSA funds once your account reaches a certain balance. In many cases, the minimum balance is between $1,000 and $2,000. HSA investment options often include mutual funds, stocks and bonds.
