Health Savings Accounts (HSAs) have become very popular in the insurance industry in recent years. Employers and employees alike are seeing the value in High Deductible Health Plans (HDHP) paired with HSAs as a way of keeping premium low and tax-savings high. In a recent study from Kaiser Family Foundation, it was reported that 17% of firms offering health benefits offer an HSA-Qualified HDHP – a statistic that has more than doubled in the past decade.
But while employees know the advantage of having an HSA, can they confidently say that they know how to keep proper records for their expenses? Here are some tips for avoiding potentially expensive tax headaches down the road:
1. Documentation is Key
Prior to reaching age 65, funds in an HSA can only be used for Qualified Medical Expenses as established by law. It’s important to know what health services can be paid for by an HSA and what can’t. Non-qualified distributions from your HSA could face a penalty of 20% unless you can prove that your purchase was for a qualified medical expense. Hold onto any receipts for items or services purchased with HSA dollars as you’ll need those to protect yourself from penalties.
2. Hold Onto your HSA Statements
HSA providers send out statements either by mail or electronically just like any other bank account. These statements outline any contributions made by employers or employees, payments made out of the account, interest earned and any charged fees. Be sure to file these statements as they may be required in the event of an IRS audit.
3. Track Your Expenses and Payments
When it comes to money, keeping an eye on where it’s coming and where it’s going is always a good idea. It’s an even better idea when it comes to HSAs. While most HSAs come with a credit card or debit card, there may be times when a claim needs to be submitted on your own, in which case it might be easy to forget to use your HSA when the invoice comes. There may also be times in the year when you don’t have enough in your HSA to cover your expenses and you need to submit a claim for reimbursement as a later date. Tracking your expenses and payments will help you to know what you’ve submitted, what you’ve paid, and what still needs to be paid. Plus, it’ll help you hold onto that supporting documentation we clearly believe is so important. Speaking of which…
4. Maintain Your Records
It’s recommended that you hold onto your HSA documentation, purchase receipts, statements, and tracking records either for as long as you maintain the HSA or for as long as your income tax return is still considered “Open”, or subject to an audit – whichever is longer. Hang onto and Explanation of Benefits (EOBs) that you receive from your insurance carrier as documentation of your expenses for services that were covered under your health plan. If the IRS comes knocking, these are the things you’ll need to provide to protect yourself against any penalties.
This article is to be used for informational purposes only and is not intended to be construed as legal advice.