HSAs 101: How a health savings account works

Requirements

You must be eligible.

• You can't be covered by any other medical plan or flexible spending account, unless it's a limited FSA. Your spouse or your children CAN be covered by another health plan.
• You can't be enrolled in Medicare Parts A, B, or D.
• You can't be claimed as a dependent on anyone else's tax return.

You must be covered by a high-deductible medical plan.

• The government's definition of a high-deductible health plan changes each year. For 2011/2012, it means at least a $1,200 deductible for singles and a $2,400 deductible for families. For 2013, it means at least a $1,250 deductible for singles and a $2,500 deductible for families.
• Your Priority Health medical plan can be an HMO, POS, or PPO.

You set up a health savings account (HSA) in your name.

• Your HSA is administered by a bank. Learn how to set up an HSA.
• You, your employer or anyone else can put money into your HSA each year.
• If you contribute money through payroll deduction, it comes out of your paycheck tax-free.
• The total amount you can put in your HSA each year is limited by the IRS. If you're over age 55, you may put in additional "catch-up" money.
• If you don't use the money in your HSA, it builds up and will begin to earn interest. You won't have to pay taxes on the interest.
• You own your HSA and all the money in it. If you change health plans and are no longer eligible for an HSA, different rules will apply, but the money remains yours.

Paying for health care 

You pay 100% of the cost of your health care out of your pocket until you meet your deductible.

But there's good news:

• Some preventive health care services are exceptions; you might only pay a copay for those. See your medical plan for more information.
• Your Priority Health medical plan entitles you to a discount at health care providers in your plan's network. You need to know what plan you have - HMO, POS, PPO, etc. Then you can use the online Find a Doctor directory to find doctors, specialists, hospitals and other providers in your plan's network.

Use the money in your HSA to reimburse yourself for your medical expenses.

• Careful! HSA funds can only be used to pay for "qualified" health care expenses.
  See a list of health care expenses that you can use your HSA to pay for.
• Even if your spouse or children are covered by another medical plan, you can use your HSA funds to pay for their medical expenses.
• Create two files (or shoeboxes!) for your receipts - one named "PAID BY HSA" for the medical expense receipts that have been paid for out of your HSA, and one named "NOT PAID BY HSA" for receipts that you paid cash for but haven't reimbursed yourself for yet from your HSA.
• Your HSA will come with a debit card you can use at your doctor's office, pharmacy, etc. Use it to pay some medical expenses directly out of your HSA. Be sure to get a detailed receipt for each expense and put it in your PAID BY HSA file.
• When you pay cash for a medical expense, you will also need a detailed receipt. Keep these receipts in the NOT PAID BY HSA file.
• You can reimburse yourself for the receipts in the NOT PAID BY HSA file any time your HSA has enough money - from right away to years later.
• To reimburse yourself for an expense, write yourself a check from your health savings account to pay yourself back.
• Mark the receipt "Reimbursed through my HSA" and the date. Then put  the receipt in your PAID BY HSA file, in case the IRS ever asks to see your receipts.
• Investment idea: If you can afford to pay cash for your health care expenses now, you can let your HSA money earn interest and build up. Then you'll have more tax-free money to pay for health care expenses later, such as when you retire.

Paying for your prescriptions

You pay 100% of the cost of your medications out of your pocket until you meet your deductible.

• The cost you pay will be a discounted cost because Priority Health negotiates pricing with pharmacies.
• Reimburse yourself from your HSA by following the directions above, "Use the money in your HSA...".
  • Only drugs manufactured in the U.S. can be paid for with HSA funds.
  • You can't use HSA funds to pay for over-the-counter drugs unless you have a prescription.
• Always show your ID card and ask the pharmacy to bill Priority Health, even when you pay the whole cost. This will ensure your prescription costs are applied toward your deductible.

After you meet your deductible

• Your plan's prescription benefits will cover all or most of the cost.  
• You can use HSA funds to pay for copays/coinsurance.
• If you reach your out-of-pocket maximum (refer to your Summary of Benefits) you'll no longer pay anything for covered drugs.

Money-saving tips

• It pays to shop around — prices can vary from pharmacy to pharmacy
• Always ask for generics

At tax time

• You will need to file IRS Form 8889 each year to tell the IRS about your HSA contributions and withdrawals for the year.
  See or print Form 8889 (122KB PDF)
• If you or anyone else make contributions to your HSA that are not tax-free payroll deductions, you can take an "above the line" tax deduction on your tax return each year. You would include this information on Form 8889 as well.

Resources

Read the IRS Publication 969, "Health Savings Accounts and Other Tax-Favored Health Plans," to learn more about using your HSA. 
Go to Publication 969.

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