Since 2004, Health Savings Accounts (HSAs) have provided employees covered under High-Deductible Health Insurance Plans (HDHPs) with a convenient way to pay for out-of-pocket healthcare expenses including deductibles, copays, and coinsurance for things like routine doctor, dentist and vision appointments, specialty care, and prescriptions. In recent years, as healthcare costs continue to rise, there has been an increased interest in HSAs. Of the estimated 25 million HSAs in place at the end of 2018, 71% had been opened since 2015.1
The triple tax benefit of the HSA is one reason for the account’s popularity. Typically, employees fund an HSA through pretax payroll deductions. Account holders earn interest on their balances tax-free and can make tax-free withdrawals for qualified purchases. (Meanwhile, employers also save on payroll taxes.) The account has other advantages as well. Unlike a Health Reimbursement Arrangement (HRA) or a Flexible Spending Account (FSA), there is no end-of-year, use-it-or-lose-it provision. The account can grow from year to year tax-free with no limit to how much can be rolled over. The HSA belongs to the employee and is portable. In fact, one of its most valuable benefits is that it can be used in retirement to pay for Medicare premiums and other health-related expenses.
Over the years, the rules around Health Savings Accounts have changed to meet evolving healthcare needs. In 2019, the IRS broadened its list of qualifying HSA expenses to include services and items useful in the prevention of heart disease, diabetes, asthma, depression, osteoporosis, and other health conditions.
Now, HSAs have changed again to meet the unique needs of the current pandemic. In March 2020, the IRS announced that testing and treatment of COVID-19 could be covered by a HDHP without eliminating the plan’s status as a High-Deductible plan. (They were given “flexibility…to provide health benefits for testing and treatment of COVID-19 without application of a deductible or cost sharing.”2) Qualifying expenditures include thermometers and vaporizers, professional counseling and treatment for depression or anxiety related to the pandemic, massage or acupuncture, and alcohol or drug dependency programs. The passage of the CARES Act in March, removed the requirement that prescriptions are necessary to use HSA dollars for the purchase of over-the-counter (OTC) medications (retroactive to January 1, 2020).3
Since layoffs have been an unfortunate reality of the economic fallout from the pandemic, it’s important to note that unemployed persons can use HSA funds to pay health care premiums on COBRA coverage or an independent policy.
Finally, the extension in the federal income tax filing deadline brought about by the pandemic also means an extension of the deadline for 2019 HSA contributions until July 15. So, it might benefit some employees to make retroactive contributions to their accounts for expenses incurred last year. Employees can fund the account up to the 2019 maximum of $3,500 for individuals and $7,000 for families, with an additional $1000 allowance for persons 55 and older. This year’s maximum has increased to $3,550 for individuals and $7,100 for families.
1 “Health Savings Account Balances, Contributions….,” EBRI, December 2019: https://www.ebri.org/content/health-savings-account-balances-contributions-distributions-and-other-vital-statistics-2018-statistics-from-the-ebri-hsa-database
2 “High deductible health plans and expenses related to COVID-19,” IRS 2020: https://www.irs.gov/pub/irs-drop/n-20-15.pdf
3 “How does the CARES Act affect my HSA?” HSA Store, 2020: https://hsastore.com/cares-act-faqs