Health savings accounts: How do they work?

As consumers continue to take a more active role in their health care, Health Savings Accounts (HSA) are becoming more common.

An HSA is a tax-exempt savings account for eligible out-of-pocket medical expenses. A few things you need to know about HSAs. By law, only people with a High-Deductible Health Plan (HDHP) can open an HSA. The federal government defines both the minimum deductible required for an HDHP each year, as well as the annual contribution limits.

HealthEquity is the Blue Cross and Blue Shield of North Carolina (Blue Cross NC) preferred partner for all Fund Management Accounts, including the HSA. The benefit of using HealthEquity when you have a Blue Cross NC medical plan is that your account will be fully integrated. This means that you’ll have access to the HSA Member portal through Blue Connect where you can access claims, manage investments and pay for your medical expenses. This saves the member time and trouble.

HealthEquity handles all HSA administration, including activation of accounts, fund distributions, around the clock customer service and tax forms.

• Contributions are not taxed and anyone can contribute on the account holder’s behalf.
• Any interest or earnings on the HSA grow tax-free.
• Payments for qualified medical expenses are not taxed.
• HSA funds can be invested.
• There’s no use-it-or-lose-it like with a Flexible Spending Account. The money left in the HSA at the end of the plan year rolls over to the next year.
• The money in the account belongs to you, not your employer.
• HSAs are portable if you change jobs or change health coverage.

The following criteria is used to determine eligibility

• The member must be enrolled in a qualified HDHP.
• The member cannot have medical benefits from any other non-qualified health plan. See other health coverage here.
• The member is not eligible to be claimed as a dependent on another person’s tax return.
• The member must not be eligible for Medicare.

Once you elect the integrated account and choose the HSA contribution amount this is what will happen next:

• Blue Cross NC will load your data and forward it to HealthEquity.
• HealthEquity sets up your HSA account and sends you a “Welcome Kit” with instructions for online activation and steps for setting your account preferences.

For group plans, you and/or your employer may contribute to the account up to the IRS limit. Typically you’ll contribute through payroll deductions. In addition to setting automatic contributions you may also contribute additional funds at any time through a secure bank transfer. 

For individual plans, the individual, family members or anyone else can make contributions on behalf of an eligible individual. Contributions can be made at any time during the year in any increment. You can make contributions all at once in the beginning or the end of the year or in equal amounts throughout the year. Contributions can be made in cash or through a rollover from another HSA. Rollover contributions are not subject to the annual contributions limits. 

The money can be used to pay your deductibles and coinsurance for qualified medical expenses, including those not covered by the health plan, like dental and vision care. If you use your HSA for non-qualified expenses, the money you withdraw will be subject to income tax and an additional 20 percent penalty. After age 65, the 20 percent penalty is not applicable although the distribution is treated as taxable income.

If you are no longer eligible to contribute toward an HSA, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses if you still have money in your account.

Expenses incurred before you establish your HSA are not qualified medical expenses. For example, if this is the first year you’ve had an HSA, you cannot use that money to pay for any expenses incurred in a previous year.

Monthly premiums are not considered qualified medical expenses; except for

• Qualified long-term care insurance
• COBRA health care continuation coverage
• Health care coverage while an individual is receiving unemployment compensation

People over 65 can use their HSA funds to pay premiums for Medicare Part A, Part B, or Part D, Medicare HMO, or for employer-sponsored health insurance or employer-sponsored retiree plan. However, you can’t use HSA money to pay premiums for Medicare supplemental plans.

The HSA is a savings account and you are the account holder/owner. Materials including debit cards and checks, and documentation will always be in the account holder’s name.

If the account holder is married and passes away, the spouse will become the owner of the HSA and may use it as if it were his or her own HSA. If the account holder wasn’t married, the account will pass to his or her designated beneficiary or become part of the subscriber’s estate (subject to applicable taxes).