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Should H1-B Workers Use An HSA? Thumbnail

Should H1-B Workers Use An HSA?


A Health Savings Account (or HSA) is an account to help individuals pay for medical expenses. 

The main benefit of an HSA is that you can take pre-tax dollars from your paycheck, put them in an HSA, and you can then withdraw funds from the account tax-free if you use the proceeds to pay for qualified medical expenses. The funds in an HSA may grow tax-deferred if invested in the markets, and the earnings won’t be taxed if withdrawn to pay for qualified medical expenses.

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How do I open one? 

You may open an HSA with your employer or with a bank, an insurance company or credit union. Some of the biggest HSA plan providers are:

  • HSA Bank
  • HealthSavings Administrators
  • Optum Bank
  • UMB Bank

The benefit of opening an account through your employer is that the contributions will be pre-tax and exempt from payroll taxes. There are some exceptions where an employee’s HSA contributions will be subject to payroll tax - if an employer does not elect to use what is called a Section 125 plan - but they are rare.

If you have a High Deductible Health Plan (HDHP), you can contribute tax-free every year to an HSA.

The contribution limits for 2019:

  • Self-only coverage: $3,500
  • Family coverage: $7,000

The contribution limits for 2020:

  • Self-only coverage: $3,550
  • Family coverage: $7,100

Individuals who are 55 years old and above can contribute an additional $1000 per year, which is called a catch-up contribution.

So, if you make the maximum contribution in 2019 for self-only coverage and your overall effective tax rate is 24%, this saves you $840 per year (24% of $3,500).

In addition, employers can contribute to your HSA as well on top of your personal contributions - however the maximum can’t exceed the contribution limits stated above. These employer contributions are not considered income and are not subject to income or payroll taxes.

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What’s the big deal? Why is an HSA beneficial? 

HSAs provide taxpayers with a great way to reduce their tax bill and to save for the inevitable healthcare expenses. Whether you itemize or take the standard deduction, you can deduct all the contributions to your HSA, except those made by your employer. 

Contributions made through a so-called “cafeteria plan” may also be excluded from your income. A cafeteria plan - sometimes called a Section 125 Plan - refers to a selection of certain tax-advantaged benefits that employers allow qualified employees to choose from.

Certain HSAs allow you to invest the funds so that they can grow in index funds and ETFs. These earnings on your HSA contributions will also grow tax-free. As long as you use your HSA funds to pay qualified medical expenses, you do not have to pay any taxes. 

For instance, say you contributed $3,500 on your HSA and the fund earned $200 during the year. If your effective tax rate is 32% and you didn’t receive the tax benefits of the HSA, you would have paid $1,120 on that amount in income tax and $30 in capital gains tax (on the $200 capital gain). Instead of using that money to pay the IRS, you can keep it in your HSA and use it for healthcare expenses. 

Moreover, HSAs are portable. If you change jobs or become self-employed or unemployed, your HSA stays with you. It is not “use it or lose it.” 

You can make the maximum HSA contribution for that year as long as you become eligible on the first day of the last month of your tax year (which for most taxpayers is December 1).

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Am I eligible for an HSA?

To open an HSA, you need to meet the following criteria.

 Requirement #1: You Should Have a High Deductible Health Insurance Plan  (HDHP)

Your health insurance coverage meets the HDHP requirement if the annual deductible meets the minimum deductible limits set by the IRS each year. The deductible refers to the amount you need to pay on your own before your insurance kicks in.

For 2019, the minimum annual deductible for plans eligible to be used in combination with an HDHP is:  $1,350 for self-only coverage and $2,700 for family coverage.

For 2020, the minimum annual deductible for plans eligible to be used in combination with an HDHP is: $1,400 for self-only coverage and $2,800 for family coverage.

Certain plans have family deductibles with individual deductibles for each family member. These plans must meet HDHP requirements to be eligible for an HSA. Even if the annual deductible for the family is $5,000, the individual deductible for each family member must be at least $2,700 to be considered HDHP.

Requirement #2: You Do Not Have Any Other Health Insurance Except Additional Coverage Allowed by the IRS

As a rule, you should have no other health insurance coverage aside from your primary high-deductible plan when you open an HSA but the IRS allows a few exceptions including insurance for: 

  • Worker’s compensation, liabilities for property ownership, tort liabilities
  • Hospital income benefit
  • Specific illness or disease
  • Accidents
  • Dental Care
  • Disability
  • Long-term
  • Vision Care

Requirement #3: You Are Not Enrolled in Medicare 

When you enroll in Medicare, you can no longer make contributions to your HSA. But you can still withdraw your HSA funds tax-free if you use the proceeds to pay expenses such as premiums, coinsurances, deductibles, and copayments for health insurance.

Related Article | What Every Immigrant Needs to Know About Medicare

Requirement #4: You Cannot be a Dependent on Someone Else’s Tax Return for the Year

You are not allowed to open an HSA if someone claims you as a dependent on their tax return. But if you are included in your parents HDHP family coverage, you may contribute to your parents’ HSA. Likewise, any medical expenses you incur while you remain as a dependent is a qualified medical expense. 

What is the Difference Between an HSA, HRA, and FSA?

All of these acronyms can be confusing. You may have heard of terms like FSA or HRA alongside HSAs. They are all types of accounts that you can use to save for medical expenses. Like the HSA, Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs) offer tax benefits. But, they are not the same.

Here are some easy ways to distinguish between them!

Health Savings Account (HSA)

  • Contributions: An HSA may receive contributions from an eligible individual or any other person, including an employer or a family member, on behalf of an eligible individual. 

  • Distributions: Distributions from an HSA that are used to pay qualified medical expenses aren’t taxed. 

  • Taxes: Contributions, other than employer contributions, are deductible on the eligible individual’s return whether or not the individual itemizes deductions. Employer contributions aren’t included in income. 

  • Time Requirements: HSAs may be rolled over from one year to another. In addition, HSA funds may also be invested (via a brokerage account) to ensure growth.

Health Reimbursement Account (HRA)

  • Contributions: An HRA must receive contributions from the employer only. Employees may not contribute.

  • Distributions: Reimbursements from an HRA that are used to pay qualified medical expenses aren’t taxed. 

  • Taxes: Contributions aren’t includible in income. 

  • Time Requirements: In most cases, an HRA is a “use it, or lose it” account.

Flexible Spending Account (FSA)

  • Contributions: A health FSA may receive contributions from an eligible individual. Employers also may contribute.

  • Distributions: Reimbursements from an FSA that are used to pay qualified medical expenses aren’t taxed. 

  • Taxes: Contributions aren’t includible in income. 

  • Time Requirements: In most cases, an FSA is a “use it, or lose it” account. Some employers, however, allow employees to roll-over up to $500 from one year to another.

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What can I use the money in my HSA for?

You can use the money in your HSA for qualified medical expenses not covered by your insurance for yourself, your spouse of any of your qualified dependents.

Qualified medical expenses may include payments for medical and dental services such as doctor’s fees, laboratory fees, prescribed medicines, and necessary surgeries. Expenses for purely cosmetic reasons such as facelifts and health transplants are not typically considered qualified medical expenses. 

Take note that you have to keep your receipts for at least three years. Unless the IRS suspects fraud, they will not typically request records beyond three years.

If you withdraw funds for any purpose other than for qualified expenses, the distribution becomes taxable. In addition, you’ll have to pay a 20% penalty. 

How do I use the money in my HSA?

Method 1 - Debit Card

A health savings account usually comes with a debit card that is often a Visa or common credit card. You can use your HSA debit card to pay the pharmacy or your medical provider. You may also use your debit card to pay qualified medical expenses in cash or pay through online fund transfer.

Method 2 - Reimbursement

You may request reimbursement for medical expenses you paid using your personal funds. Your HSA will mail you a check or do a direct deposit to your account. There is no time requirement to request reimbursement from your HSA provider. If the funds in your debit card are not enough to cover your medical expense, you can claim reimbursements for eligible expenses you paid with your personal funds. 

You should keep all receipts related to your medical expenses to prove that your HSA funds were used for qualified expenses in case of an IRS audit.

Can I open an HSA outside of my employer or does it have to be through my workplace health insurance?

Yes, you can open an HSA without the help of your employer as long as you have an HDHP. In this case, you have to pay after-tax dollars on your HSA. But you can recover the taxes you paid when you submit Form 8889 HSA Contributions and Deductions and claim the HSA deduction in your annual tax return.

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If you are on an H-1B, saving in an HSA is a great idea.

Everyone will eventually incur health expenses and an HSA is a great way to save for those expenses in a tax-advantaged way. HSAs are beneficial whether you incur health-related expenses in the US or back in your home country.

Non-citizens legally employed in the US can open an HSA or use their employer’s plan as long as they meet the high deductible health plan requirements. Most banks and HSA trustees will allow you to open an account if you have a Social Security Number and a valid US address. H-1B visa holders have SSN and a valid address, so even if you have non-immigrant status, you can open an HSA.

Note: If you are eligible for your home country’s national health coverage, you cannot contribute to an HSA because it violates Rule #2 (no secondary insurance). For US citizens and permanent residents, for instance, you can’t contribute to an HSA if you enroll in Medicare.

If you are planning to stay in the US for more than a year, and if your health plan meets the high deductible requirements, it is a good idea to use an HSA to save for medical expenses. Take note that it’s not enough to open an account, you need to put money in it to activate your account. 

If you are only staying in the US for a year at most, it may not be worth the trouble to deal with the complexities of maintaining an HSA.

What happens to my HSA if I move back to my home country? Can I use the money for healthcare expenses outside the US?

When you leave for your home country, you have several options for what to do with your HSA.

Option #1: Leave your HSA and use it for qualified medical expenses

Even if you are no longer eligible for an HSA, you can still take tax-free distributions from the account although you can no longer contribute to the fund. You can also use your HSA as an emergency fund and use it for medical expenses in your home country.

In this case, you have to file a Form 1040NR when you take HSA distributions for any year but you don’t have to pay any tax if the fund is used for qualified medical expenses.

If you use the debit card for your HSA abroad, you may have to pay conversion fees which can range from 1% to 3%. 

Option #2: Withdraw your HSA and pay the penalty

If you want to take your HSA savings when you leave, you have to pay taxes on your contributions and any interest earned. You also have to pay the 20% penalty since the distribution if not for a qualified medical expense. This penalty applies unless you are 65 or above or if you have a disability. 

Option #3: Wait until you are 65 before withdrawing your funds

Your HSA can serve as a retirement vehicle. When you reach 65, you can withdraw your HSA without paying the 20% penalty. However, you will still owe income tax on the distribution if not used for qualified expenses.

Related Article | What To Do With Your 401(k) if You Move Back To Your Home Country

If you switch to another job, you have three options for your HSA.

When you change employers, you can take your HSA with you since it belongs to you. Here are some things you can do depending on your situation. 

Scenario #1: Your New Employer Offers a Better HSA And You Sign Up For An HDHP

If your employer offers better terms for the HSA, you may roll the money over from your old HSA to the new one.

Scenario #2: You Get A New Job And No Longer Have An HDHP

If you are no longer under an HDHP coverage with your new employer, you are not allowed to make contributions to your HSA that you had with your former employer. But you can still maintain the account with your old employer. You may have to contact the bank your old employer uses for your HSA. If your old employer paid for maintenance fees and other account-related expenses, you may have to shoulder these costs if you continue to contribute to your HSA after you resign. You can use your existing HSA to pay for medical expenses without incurring taxes until you use up all the funds in the account.

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Scenario 3: You Prefer To Take Personal Possession Of Your HSA

You may also rollover your employer-sponsored HSA to a personal account. You should receive a check from your old HSA trustee if you do a rollover. You need to deposit this check to your new HSA within 60 days from receipt. 

If you don’t deposit the funds within this period, you would have to pay the 20% penalty for nonqualified distribution!

In addition, you may only do a rollover once every 12 months. There are usually charges for transferring your account to a new provider which may range from $15 to $90. 

Rollovers should not affect your annual HSA contribution limit. You should also report rollovers on Form 8889. 

An HSA can be a great, tax-advantaged say to save for inevitable medical expenses regardless of your current health. Since they are highly portable and can be used in the US or abroad, you should duly consider contributing to your HSA if you are eligible. 

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