Maximizing Your Health Savings Account Tax Benefits

According to data published by the Employee Benefit Research Institute, the average Health Savings Account contribution for taxpayers who set up their own HSA was just $2,032 in 2013 and for those with employer- sponsored accounts a paltry $1,184. I see a similar pattern among my own clients; their employers contribute $600 or $800 or a $1,000 a year towards an HSA but they never contribute anything, either directly or, better yet, through salary deferrals or Section 125, which not only avoid income tax but also avoid FICA and Medicare taxes. ”It’s a no-brainer”. That’s what I tell my clients, at least those who can afford to make extra contributions and especially those with IRA accounts. An HSA is even better than an IRA — when you retire HSA funds can pay for medical bills and even Medicare premiums (Parts A, B or D) tax-free. Better yet, HSA accounts can be inherited by a spouse who also can use it to pay medical bills and Medicare premiums tax-free.

I also advise my clients to use their HSA to full benefit. Most taxpayers know to use their HSA debit cards at the doctor’s office or at the drug store for prescriptions, but few think to use it for non-prescription items. Look through your drug store receipts. Anything marked “FSA” on those receipts can be purchased with HSA funds. (FSA stands for “Flexible Spending Account” and the rules for spending from a FSA are the same as from an HSA.) The ACA law (Obamacare) took away eligibility for things like aspirin, vitamins, cold remedies and all other forms of self-medication. However, medical supplies are still eligible, things like band-aides, support hose, ace bandages, adult diapers, etc. You can also spend HSA funds at the dentist even if you don’t have dental insurance. You can spend the funds for glasses purchased on-line and for medical supplies that you order from Amazon or another on-line vendor. Remember that you can reimburse yourself with HSA funds for out-of-pocket money you spend for eligible items when it’s not possible to use the health debit card, although some HSA trustees might require you to submit a reimbursement form to do so.

Here’s another trick I can pass along. Have your doctor provide a prescription for any non-medication that you use regularly. For a few years my wife was buying over-the-counter Prevacid every month due to stomach issues, so I had her doctor write a prescription for it. I have a client who uses Mucinex on a regular basis, so I told her to get a doctor’s prescription and then to pay for it with her HSA card. The trick is to spend before-tax money for medical expenses whenever possible.