Health Savings Account (HSA) FAQs

1. What is a Health Savings Account (HSA)?

An HSA is an account established by an individual to pay for health care. To set up an HSA, the individual must be covered by a federally qualified High Deductible Health Plan (HDHP). HSAs are owned by the individual, balances roll over from year to year, and the funds are portable, meaning the employee keeps them if they leave the HDHP plan or state service. The funds in an HSA can be used to pay for qualified medical expenses that are not covered by your health plan, and can be saved for future expenses on a pre-tax basis. The funds can also be invested. Contact Optum Financial for investment options. See Question: Does my HSA earn interest? below for more information.

2. How is an HSA different from the Flexible Spending Accounts (FSA) that are offered to state employees?

A participant is only eligible for an HSA if they are enrolled in a federally qualified HDHP. A participant may not enroll in both an HSA and a regular health care FSA at the same time, although the FSA can be converted to an allowed Limited Purpose Flexible Spending Account (LPFSA). Both types of accounts allow a participant to set aside money pre-tax to pay for healthcare expenses, however, there are some key differences shown in the table below:

HSA and Medical FSA Key Differences

See Optum's HSAs & FSAs Comparison Grid for more information.

3. Do I have to use my HSA to pay for my deductible?

No, you choose how you pay for your deductible.

4. What is a qualified medical expense?

See Optum's medical expense eligibility tool.

5. Are there expenses that I can’t use my HSA to pay?

Yes, some of the expenses include cosmetic surgery, exercise equipment, fitness programs, household help, teeth whitening, and family or marriage counseling. See a list of qualified expenses.

6. Do I have to enroll in the HDHP in order to open an HSA?

Yes. You cannot enroll in a state-sponsored HSA through your employer unless you are enrolled in the HDHP.

7. Who can add money to the HSA?

Anyone can contribute money to your HSA. Your employer can make pre-tax contributions to your HSA. You can also choose to contribute tax-free dollars through your payroll. Any others who choose to contribute to your account would do so on an after-tax basis, although you would be able to deduct the contribution from your gross income on your tax return.

Note: If you make additional after-tax contributions and have met the contribution limit, you may forfeit any HSA employer contributions via your payroll deduction.

8. If I receive a contribution to my HSA in the form of a gift (from friends/family), can I still deduct the contribution from my gross income on my tax return?

Yes. Contributions made to an HSA by a family member on behalf of an eligible individual are deductible by the eligible individual in computing adjusted gross income. The contributions are deductible whether or not the eligible individual itemizes deductions.

9. Can I use a paycheck deduction to contribute additional money to my HSA?

Yes, you can arrange this through your payroll office. When you complete the HSA enrollment process, you will have the option to choose a pre-tax paycheck deduction amount. Note: LTEs are eligible to contribute to an HSA through payroll deduction if they are benefit eligible.

10. Is there a limit on how much money I can contribute to the HSA?

Yes, the limits are available online in the HSA Information section. The IRS updates the annual limits each year, so the limit in future years may be different. All contributions, including those made by your employer or another person, are combined when applying the contribution limit.

11. Do I have to use the money in my HSA before the end of each year?

No, your HSA balance will roll over from year to year.

12. Does my HSA earn interest?

Yes, your HSA balance earns interest. You can also choose to invest a portion of your HSA balance once you have a $1,000 balance in your account. More information is available at Optum's website.

13. Is there a tax benefit to having an HSA?

Yes, the contributions made by your employer are not taxable income. This money is yours, tax-free, as long as you spend it on qualified medical expenses. You can also make pre-tax contributions to your HSA, contact your payroll office to arrange this.

14. I'm enrolled in the HDHP with an HSA for myself only. Can I use my HSA to pay for my spouse, domestic partner, or children's medical expenses?

Yes, as long as you use the funds to pay for qualified medical expenses, you can pay for any family member who is a tax dependent on your tax return. You may also use the funds for medical expenses incurred by your child who is claimed as a tax dependent by their other parent.

15. What if my spouse and I file separate tax returns?

The IRS views spouses as one tax unit, even if filing as "married filing separately," so if either spouse is eligible for a family contribution limit, that is intended to cover both spouses. The IRS suggests that the family limit be split evenly between the spouses unless a separate allocation is desired.

16. What happens to my HSA if I change health plans, terminate employment, or retire?

The money in the HSA belongs to you. You can continue to use the money in your HSA to pay for qualified medical expenses but you can no longer make contributions to the account unless you are enrolled in another HSA-eligible HDHP.

Employees who retire and are over the Social Security Administration’s (SSA’s) full retirement age (e.g. age 65), will begin their SSA benefit retroactively, for up to 6 months. If they are enrolled in the HDHP and take their SSA benefit:

1. The former employee's health contract must be changed to the non-HDHP plan design with the same health plan, effective on the first of the month in which they are first enrolled in any part of Medicare. They will be responsible to pay additional employee premium contributions for the retroactive change.
2. Any HSA contributions the former employee or their employer has made will be subject to tax penalty as they will be considered “improper contributions,” because retirees on Medicare cannot contribute to an HSA. 

If the employee over age 65 thinks they will retire in the next year, they should not enroll in the HDHP in that year, to prevent any improper contributions towards their HSA.

17. When can I withdraw money from my HSA?

You can withdraw money at any time if it’s used for qualified medical expenses. However, if you withdraw money for other purposes, your withdrawal will be subject to income tax (if the contribution was pre-tax) and a 20% penalty.

18. If I change to another employer who offers an HSA contribution, can I use the same HSA?

You can keep your HSA open as long as you choose. This is your account. Your new employer may or may not contribute to this HSA. Once you leave state service you are responsible for any account maintenance fees.

19. What happens to my HSA once I turn age 65?

You can continue to use your account tax-free for qualified medical expenses. Once you turn age 65, you can also use your account to pay for things other than medical expenses. If used for other expenses, the amount withdrawn will be taxable as income but will not be subject to any other penalties. Individuals under age 65 who use their accounts for non-qualified medical expenses must pay income tax and a 20% penalty on the non-qualified withdrawal.

20. What happens to my HSA if I get a divorce?

The HSA is an asset that is treated like any other. The HSA may be transferred between two divorcing parties as part of the divorce agreement. Either parent may use HSA funds to cover their children's eligibility expenses under IRS Regulation and it does not matter which parent considers the children to be dependents for income tax purposes or which parent maintains physical custody of them.

21. Can I use my HSA to pay for medical expenses incurred by my children who are claimed as tax dependents by my former spouse?

Yes.

22. Can I use my HSA to pay for medical expenses that I incurred prior to opening my account?

No, you can only pay for medical expenses incurred after establishing your HSA.

23. Can I use my HSA to pay for medical services from out-of-network providers?

Yes, you can use your HSA to pay for any qualified medical expenses from any provider.

24. I'm retired and enrolled in the HDHP with an HSA. Can I still contribute money to my HSA?

Yes, as long as you are not currently eligible for or enrolled in Medicare. Retirees are required to enroll in the HSA each year if they elect the state-sponsored HDHP. 

25. I have a Flexible Spending Account (FSA). Can I still have an HSA?

It depends. You can have a limited-purpose FSA, which only allows you to pay for qualified vision, dental, and post-deductible expenses. However, the IRS prohibits you from having a general-purpose Health Care FSA and an HSA at the same time because they have almost identical qualified medical expenses, and because the IRS considers a Health Care FSA to be “other health insurance coverage.” It is permissible to still have a Dependent Day Care Account when you have an HSA.

26. I have a general-purpose health care FSA. Can I still enroll in the HDHP, even though I can’t have an HSA and FSA at the same time?

You can enroll in the HDHP for the next plan year if you are enrolling during the annual open enrollment period. You will be required to spend any remaining FSA funds before the HDHP can take effect and before you are eligible to open an HSA. In some cases your FSA funds may be converted to a limited-purposed FSA; check with your employer on this.

27. What survivor benefits are associated with an HSA?

Your HSA would transfer to your beneficiary tax-free.

28. Do I need to keep my receipts showing what I withdrew from my account?

It is recommended that you keep your receipts. If you are audited by the IRS, you may need to explain any funds you used from your HSA.

29. Am I required to respond to the Customer Identification Program (CIP) for my HSA to be established? 

Yes. If the HSA Custodian Bank is unable to verify your identity, they may contact you for additional information, such as a copy of your driver's license, a W-2 tax form, a Social Security card, or another form of acceptable identity documentation. 

If you do not respond with the necessary documentation within 90 days, the HSA account will be closed and your HDHP enrollment will be invalidated. Furthermore, your health insurance coverage will change from the HDHP to the IYC Health Plan, the non-HDHP Uniform Benefit plan design, with your current health plan. You will not be able to change your health insurance coverage after the 90-day deadline has passed and your HDHP coverage has been converted to the IYC Health Plan. 

30. How do I update my HSA beneficiary? 

You can update your HSA beneficiary through your Optum Online Account under Settings and Preferences. You can also submit an HSA Designation of Beneficiary Form to Optum Financial. 

31. Can I transfer HSA funds from another administrator into my new HSA with Optum Financial?

Yes, you can transfer any amount of funds from a previous HSA into a new HSA with Optum. The amount you transfer does not impact your annual HSA contribution limit. 

To transfer funds, complete a transfer of assets form obtained from your previous HSA administrator. You will need the following information to complete the form:

• Name of Receiving Administrator / Trustee / Custodian - Optum Financial FBO
• Address of Receiving Administrator / Trustee / Custodian - PO Box 851287, 6300 Wayne Road, Westland MI 48185

32. I am a retiree in the HDHP. Am I required to enroll in the HSA?

Yes, all retirees including those who are on sick leave certification or COBRA coverage under the State HDHP are required to enroll in the State-sponsored HSA each year and maintain the HSA coverage.  By not enrolling in the HSA, you may lose your HDHP coverage.