A Health Savings Account (HSA) functions as a tax-advantaged account that can be used to cover medical expenses, specifically for taxpayers enrolled in high-deductible health plans. These differ from the more common or traditional Flexible Spending Account (FSA) in several ways, including the ability to roll funds over from one year to the next if a balance remains in the account at the end of the year. Some details of these accounts have changed due to the recent passage of the Affordable Care Act.
Early Withdrawal Penalty
The Patient Protection and Affordable Care Act, also known as Obamacare, stipulates that all withdrawals from an HSA must be used for qualified medical expenses. If someone withdraws money from the account for purchases or services that do not qualify or that are undocumented, a 20 percent penalty will be assessed. This requirement ensures that tax-advantaged funds are spent within the terms outlined for these account types. The penalty is waived for those over age 65 and who have become disabled. Prior to Obamacare, HSA penalties were only 10 percent.
Over-the-Counter Medications
Prior to the changes brought about by Obamacare, it was possible to use HSA funds to purchase over-the-counter (OTC) medications, including pain relievers, cold and allergy medicines and the like. Now, however, these items can only be purchased using an HSA if the account-holder has a prescription for them. Weight loss products and supplements, however, have never been covered by HSA or FSA policies. This change is a further effort to prevent account fraud, which has often been widespread.
Consumers should know that HSA funds can still be used for many other types of medical expenses, including those associated with insurance co-payments; dental, vision, and chiropractic expenses; the purchase of medical equipment, including wheelchairs, eyeglasses, contact lenses and diabetic meters and supplies; and medical-related transportation costs.
The areas discussed above represent the major changes to HSAs under Obamacare. Keep in mind, however, that other more minor adjustments have also been made, so pay close attention to the details of your specific HSA.
