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What Are Some Common HSA Mistakes?

HSAs are the most tax-advantaged account out there. But with great power comes great responsibility… for you. A good start? Knowing the most common HSA mistakes and how to avoid them. 
by Sarah Li Cain October 1, 2020

With open enrollment just around the corner, you’re probably beginning to think about all the great things a high-deductible-health-plan (HDHP) could hold for you during 2021. One of them? A health savings account (HSA). Who can blame you with the kind of triple-tax-benefits that await!

But starting off on the right foot with your brand new, HSA-eligible HDHP is imperative, and that means understanding a few critical HSA faux-pas that could cost you big time.

Using Funds for Ineligible Expenses

While an HSA can be used for qualified medical expenses, not all of your health-related expenses qualify for HSA reimbursement. Elective and cosmetic procedures, for instance, do not count as HSA-eligible expenses.

But here’s the good news: the CARES Act, passed in March of 2020, expanded HSA eligibility in three important ways: 

  1. Telehealth services are now an eligible expense pre-deductible
  2. Feminine care products like tampons and pads
  3. Over-the-counter medications like Advil and Zyrtec are HSA-eligible! 

There are so many health-related items you can buy using your HSA. It’s only natural that you may get some of them confused. Plus, if you have a debit card like Starship’s, you may have taken it out of your wallet and tried to pay with it for something ineligible (whoops).

So before spending with your Starship card, make sure you can prove that it’s HSA-approved. That way, you’ll avoid the IRS-imposed 20% fine. Starship’s list of eligible expenses should help keep you honest!

Using Up All Your Funds

The money in your HSA is meant to pay for things that are important to your health, right? Right. Even so, that doesn’t mean you need to spend your account down to its last pennies.

In fact, your HSA is used best when acting like a regular savings account that has a few extra benefits.

For instance, if you don’t need it in the immediate, letting your contributions, either from your employee, yourself, or otherwise, accumulate for the foreseeable future is a great idea. The money grows tax-free, so whatever you don’t use, you gain. Which brings us to our next often-made mistake.

Not Investing Your HSA Funds

Yes, you can use your HSA like a retirement account (more details on how to do that here). And depending on your HSA provider, you can absolutely invest the money you’re not planning to use for a while. So why not squeeze as much juice as you can from your hard-earned cash?

When selecting an investment plan within your HSA, check factors such as fees and what the returns are, that way you can make an educated decision about what’s best for your needs.

Using an HSA and FSA Simultaneously

Did you know that the IRS won’t let you have both an HSA and an FSA (flexible spending account) under current regulations? Well, that is unless your FSA is for dental and vision expenses only. This is referred to as a “limited purpose” FSA. 

That means if you or your spouse has both types of accounts, you’ll need to close down one of them! Learn more about how HSAs and FSAs stack up here

Using Your HSA When You’re Ineligible

Just because you’ve had an HSA in the past doesn’t necessarily mean you can contribute to it each year. To be able to make contributions, you’ll need to be on an HDHP.

Here’s an example of what this looks like: let’s say you have an HSA now and can contribute to it, but decide to switch to a lower deductible for next year. In this case, you won’t be allowed to contribute to the HSA. But any money remaining in the account can be used toward qualifying expenses, even when you no longer are covered by an HDHP.

Hack: you can even name a beneficiary for your HSA, which means your tax-free funds will never go to waste… ever.

If you’re unsure about your eligibility, double-check the guidelines of the current HSA rules in addition to talking with your insurance provider since rules can change year to year.

Putting Too Much Into Your HSA

As is true of a retirement savings account like a 401(k) or IRA, your HSA also has annual contribution limits.

For 2020, the HSA limits are $3,550 for individuals and $7,100 for families. If you put in too much money, you could find that you’ll be required to pay a 6% fine unless you remove your excess contributions before the next tax filing deadline which is usually April 15.

For 2021, contribution limits are $3,600 for individuals and $7,200 for family coverage.

Paying For Someone Else’s Medical Expenses

Technically, you can pay for medical bills for someone else if they’re your qualified dependent or spouse. A qualifying dependent means this person lives with you and you pay for at least 50% of their financial obligations. 

This means that your close friend or domestic partner won’t count, even if you’re paying for some of their groceries! Don’t make this mistake, because if you get audited by the IRS, you’ll owe that pesky 20% fine again.

That’s It!

Hopefully, you won’t fall prey to any of these mistakes—but even if you do, don’t worry too much! You can still take steps to correct them.

And if reading this post got you thinking even more about open enrollment, you’re in luck. We’ve got a piece all about the most important open enrollment mistakes to avoid right here on the blog.

Happy reading, and good luck!

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