Health Savings Accounts (HSAs) are a great way to save money for medical expenses in a tax-advantaged account. To be HSA eligible, you need to have a high deductible health plan and use the money in your HSA for qualified medical expenses. But what counts as a qualified medical expense? Can you use HSA funds for things like color science products? Let’s take a look.
What are HSAs?
First, a quick overview of what HSAs are. Health Savings Accounts are special accounts that allow you to put away money pre-tax for medical expenses. To be eligible to open and contribute to an HSA, you must be enrolled in a high deductible health plan (HDHP). An HDHP has a minimum deductible of $1,400 for individual coverage and $2,800 for family coverage in 2023. The maximum out-of-pocket costs are $7,500 for individuals and $15,000 for families.
The main benefits of HSAs are:
- Contributions are pre-tax or tax deductible
- Funds grow tax-free
- Withdrawals for qualified medical expenses are tax-free
- You own the account and keep it even if you change health plans or employers
In 2023, you can contribute up to $3,850 to an HSA if you have individual health coverage, or up to $7,750 for family coverage. An additional $1,000 catch-up contribution can be made if you are age 55 or older. HSA funds do not expire.
HSA Qualified Medical Expenses
The key to getting tax-free withdrawals from your Health Savings Account is to use the money for qualified medical expenses. The IRS defines qualified medical expenses as those that directly treat or prevent a medical condition. Some examples include:
- Doctor office visit and prescription copays
- Dental care like cleanings and fillings
- Vision care like eye exams, glasses, and contacts
- Medical equipment and supplies
- Prescription medications
- Counseling and psychotherapy
- Over-the-counter drugs and medications (requires prescription from doctor)
Importantly, cosmetic procedures and products are generally NOT considered qualified medical expenses by the IRS. So you cannot use HSA funds for things like Botox injections, teeth whitening, or plastic surgery that is not medically necessary.
Can You Use an HSA for Color Science Products?
Color Science is a company that makes skincare and beauty products like foundation, concealers, powders, and lip glosses. Their products are formulated to improve the appearance of skin. But are they HSA eligible?
Unfortunately, in most cases Color Science products would NOT be considered qualified medical expenses for HSA purposes. The IRS is very strict on what counts as cosmetic vs. medical products. Beautification is not medical care, even if you have a medical condition like acne, rosacea, or melasma that you are trying to cover up.
However, there are a few exceptions where you may be able to use HSA funds for certain Color Science products:
- Sunscreen – If the product has an SPF rating for sun protection, the IRS does allow using HSA funds since sunscreen helps prevent skin cancer.
- Acne treatment – Some Color Science products contain salicylic acid or other ingredients aimed at treating acne. Products marketed for acne treatment may qualify for HSA reimbursement.
- Doctor recommendation – If your dermatologist specifically recommends a Color Science product to treat a diagnosed medical condition like rosacea or melasma, you may be able to get a letter of medical necessity and use HSA funds.
So in summary, purely cosmetic products from Color Science are not HSA eligible. But sunscreens, acne treatments, or products recommended by your doctor for medical skin conditions may qualify. Be sure to check with your HSA provider or consult IRS Publication 502 for the latest rules.
HSA Purchases and Reimbursement
If you do want to use your HSA to purchase any qualifying medical products or services, you have a couple options:
- Use your HSA debit card or checks to directly pay for the expense. Be sure to keep your receipt in case you need to prove the purchase later.
- Pay out-of-pocket and request reimbursement. You can pay with any funds you want, then submit a claim to your HSA provider along with documentation of the purchase.
Many HSA providers allow you to submit claims online or through a mobile app. Reimbursements are usually processed within a few business days. You will also need to indicate if the expense should be categorized as medical, dental, vision, or prescription in order to track your qualified expenses.
Recordkeeping for HSA Purchases
It’s important to maintain good records when using your HSA funds. Here are some tips:
- Always get an itemized statement, detailed receipt, or Explanation of Benefits from your health insurance
- Do not throw away receipts until after filing your tax return for the year the expense was incurred
- Make copies or take photos of receipts in case originals fade or are lost
- Include dates, amount paid, provider name, and description of service or product
- Organize receipts by year either physically or digitally
In addition to receipts for medical purchases, also keep records like doctor recommendations and prescription documentation when relevant. This will help prove the validity of the expense if you ever get audited by the IRS.
Tax Reporting for HSA Distributions
When you use money from your Health Savings Account, you are required to report those distributions on your tax return. HSA providers will send you a Form 1099-SA each year detailing:
- Total distributions taken from your HSA
- Amount withdrawn for qualified medical expenses
- Amount withdrawn for non-qualified expenses
Qualified medical expenses will be tax-free. But any money used for non-medical reasons is subject to income tax plus a 20% penalty. Exceptions apply once you turn 65.
You must complete IRS Form 8889 each year when you file taxes to report HSA contributions, distributions, and calculate any taxes or penalties owed. Keep this form and your HSA records for at least 3 years after filing per IRS requirements.
Maximizing Tax Benefits of HSAs
To get the most tax advantages from your Health Savings Account, be sure to:
- Contribute up to your allowable limit each year
- Invest HSA funds wisely for tax-free growth over time
- Only withdraw money for qualified medical expenses
- Save your receipts and records in case you get audited
- Report HSA details accurately on your tax return
HSAs offer triple tax benefits – contributions go in pre-tax, growth is tax-free, and withdrawals for medical expenses come out tax-free. Taking full advantage of these benefits can lead to substantial long-term medical savings.
HSA Investment Options
Once your HSA balance reaches a certain level (usually $1,000 – $2,000), you may have the option to invest some of the money in mutual funds or ETFs. Any investment earnings grow tax-free over time, allowing your HSA savings to really grow. Here are some common HSA investment options to consider:
| Investment | Details |
|---|---|
| Stocks | Investing in individual stocks or stock mutual funds can provide growth over time but also involves more risk. |
| Bonds | Bonds and bond funds provide steady interest income and help balance the risk of stocks in an HSA portfolio. |
| Money Market | A money market fund safely preserves your HSA principal while generating a modest return. |
| Target Date Funds | Target date funds automatically adjust your asset allocation for you based on a projected retirement timeframe. |
Always compare HSA investment fees and options carefully. Some accounts charge no fees while others may charge an annual fee for investing capabilities. Asset allocation should be based on your risk tolerance and time horizon until needing the HSA funds.
Using HSA Funds After Age 65
At age 65, your ability to use HSA funds opens up a bit without tax penalty. Once you enroll in Medicare, you can no longer contribute to an HSA. But you can still use your remaining balance tax-free for qualified medical expenses. Or, you can withdraw money for any non-medical reason without the 20% penalty, just owing income tax on the distribution. Some ways people use HSA funds in retirement include:
- Paying Medicare premiums
- Medical expenses not covered by Medicare like hearing aids, dental care, glasses, etc.
- Supplementing retirement income by withdrawing funds as needed
- Leaving funds as an inheritance to pass on the tax-free growth to heirs
If you withdraw money after 65 for non-medical expenses, you won’t face the extra 20% penalty but will owe income tax at your ordinary rate. This makes HSAs a very tax-efficient source of funds in retirement.
HSA Contribution Limits
The IRS sets annual contribution limits for Health Savings Accounts based on whether you have single or family HDHP coverage. The HSA contribution maximums are adjusted annually for inflation. Here are the current and previous limits:
| Year | Single Coverage | Family Coverage |
|---|---|---|
| 2023 | $3,850 | $7,750 |
| 2022 | $3,650 | $7,300 |
| 2021 | $3,600 | $7,200 |
| 2020 | $3,550 | $7,100 |
| 2019 | $3,500 | $7,000 |
There is also a $1,000 catch-up contribution allowed annually for those age 55 and over. HSA contribution limits are use-it-or-lose it each year, so be sure to maximize your savings up to the annual max.
High Deductible Health Plan Requirements
In order to contribute to an HSA and receive the tax benefits, you must be enrolled in a qualifying high deductible health plan (HDHP). For 2023, an HDHP is defined as a plan with:
- Minimum deductible of $1,500 for individual coverage
- Minimum deductible of $3,000 for family coverage
- Maximum out-of-pocket limit of $7,500 for individual coverage
- Maximum out-of-pocket limit of $15,000 for family coverage
Out-of-pocket limits include deductibles, copays, and coinsurance, but not premiums. So an HSA-eligible HDHP will have low premiums but a high deductible you must meet before coverage kicks in. The plan may also provide free preventive care even before you reach your deductible.
HSA Plan Enrollment Statistics
Enrollment in HSA-qualified high deductible health plans has been steadily increasing over the past decade. Here’s a look at HDHP enrollment trends:
| Year | HDHP Enrollment | Year-Over-Year Growth |
|---|---|---|
| 2022 | 30.8 million | 13% |
| 2021 | 27.2 million | 14% |
| 2020 | 24 million | 17% |
| 2019 | 20.6 million | 13% |
| 2018 | 18.2 million | 12% |
According to Devenir Research, the number of people covered by HDHPs has increased an average of 14% per year over the last 5 years. This growth is being driven by rising healthcare costs and a focus on consumer-driven health plans. The combination of an HDHP and HSA can provide significant savings for those looking to reduce their monthly premiums.
Frequently Asked HSA Questions
Can I reimburse myself from my HSA for prior year expenses?
Yes, you can withdraw funds from your HSA at any time in the future to reimburse yourself for past medical expenses as long as the expense was incurred after you established the HSA. You are not limited to reimbursements in the same year the expense occurred.
Can I use an HSA to pay for medical expenses for a spouse or tax dependent?
Yes, HSA funds can be used tax-free to pay qualified medical expenses for yourself, your spouse, or any tax dependents even if they are not covered by your HDHP. Just be sure to save receipts.
What happens to my HSA if I change health plans?
The HSA belongs to you, not your health plan or employer. So you can keep and continue to use the funds even if you change insurance plans as long as you remain enrolled in an eligible HDHP.
Can I still deduct healthcare expenses on my tax return that I paid with HSA funds?
No, you cannot deduct any expenses on your tax return that were reimbursed through your HSA. The tax benefit comes from the pre-tax treatment of the funds going into the account.
Conclusion
Health Savings Accounts offer unique tax benefits that make them one of the best options for saving and paying for medical expenses. To maximize advantages, use HSA funds only for qualified medical purchases and keep good records. While most cosmetic products are not HSA eligible, some Color Science items like sunscreen or acne treatment may qualify. Check IRS guidelines closely and consult a tax advisor if you need help determining what expenses are allowed.
