I received two questions about health savings accounts (here’s a prior post on the account basics)

These are powerful accounts – both for near-term health spending or as an added tax advantaged savings account – so let’s look at the questions that arose.

Eligible Expenses

If you are able, it is a wise move to fully fund these accounts and not use them for current medical expenses. If you don’t have sufficient cash flow to fund an HSA and pay for medical expenses with other funds, by all means, use these funds to pay those bills as you still get the initial tax deduction. But, if you can leave these funds alone and invest them for the future, you benefit not only from the tax free contribution but also receive the funds and any appreciation in the future tax free as well.

A client asked what the funds can be used for – both now and in retirement. You can use your HSA to pay for a wide range of qualified medical expenses, including the following (full list included here)

Doctor visits and hospital services: Including deductibles, copays, and coinsurance

Prescription medications: As well as certain over-the-counter drugs if prescribed

Dental and vision care: Exams, procedures, glasses, contacts, and more

Hearing aids and batteries

Mental health services: Therapy, counseling, and psychiatric care

Medical equipment: Crutches, wheelchairs, blood pressure monitors, and other necessary devices

Long-term care services

Certain health insurance premiums: In specific cases, such as COBRA coverage or while receiving unemployment benefits

Qualified expenses for your spouse or dependents: Even if they aren’t covered by your HDHP

Once you are over 65, you can use your HSA to pay for Medicare premiums (Part B, Part D, and Medicare Advantage) but not Medigap. You can also reimburse yourself for any medical expenses paid earlier in your lifetime with out of pocket funds (allowing you to access the HSA without penalty).

Inheriting an HSA

Another question discussed this week concerning HSAs was what happens to them upon the death of the account holder (HSA, like IRAs, are in the name of a single person – even if that person is making the family contribution each year).

HSAs are controlled by beneficiary designations. If you are married and the account owner, listing your spouse as beneficiary allows them to inherit the HSA without tax implications. They will become the new owner and all the tax benefits of the HSA will carry over to them.

Any other beneficiary (such as your children, another non-spouse relative, or a trust) can also be named the beneficiary. However, if the account transfers to a non-spouse beneficiary, the HSA account structure will be voided and the funds will all become taxable (as ordinary income) immediately to the beneficiary.