Health savings accounts have always offered a valuable triple tax break: Your contributions are tax-deductible (or pretax if through your employer), the money grows tax-deferred and you can withdraw it tax-free for eligible medical expenses at any time. And recent changes to the rules and timely strategies make HSAs an even more important financial-planning tool. You can now withdraw money tax-free from the HSA for additional expenses, have more time to contribute for 2019 and you may be able to tap the account tax-free to pay health insurance premiums if you lose your job. Plus, a special strategy can help expand the HSA’s tax benefits even further – helping it serve as an emergency fund or source of tax-free money in the future. Here are the new rules and strategies to make the most of these accounts.

New rules allowing tax-free withdrawals for over-the-counter medications. You can now withdraw money tax-free from an HSA for over-the-counter medications in addition to prescription drugs – reversing a 2009 change that only allowed tax-free withdrawals for medications with a prescription. “Many people incurred needless visits to their doctor just to get a prescription for an over-the-counter medicine,” says Roy Ramthun, president of HSA Consulting Services. The Coronavirus Aid, Relief and Economic Security Act permanently changed the rules and now permits tax-free HSA withdrawals for pain relievers, allergy medications, acne medicines, cold and cough medicines and other over-the-counter drugs, says Jeremy Miller, founder and CEO of HSAstore.com, which sells HSA-eligible products.

“The change is effective for expenses paid as far back as Jan. 1, 2020,” says Ramthun. “If people kept their receipts, they can start reimbursing themselves now if they want to.”

Tax-free withdrawals for menstrual and feminine hygiene products. The CARES Act also made menstrual care and feminine hygiene products – such as tampons, pads and liners – HSA-eligible expenses starting on Jan. 1, 2020. You couldn’t withdraw HSA money tax-free for these expenses in the past. “Since women spend, on average, $4,752 over the course of their lives on these products, being able to use FSA or HSA dollars will be a significant help,” says Miller.

Even if you’re paying cash for these items now and keeping the money in the HSA for the future, hold onto the receipts so you can withdraw money tax-free from the HSA for these expenses later on. You can also use HSA money for many other drugstore items such as sunscreen with an SPF of 15 or higher, first aid kits, thermometers, vaporizers, nasal sprays, as well as glasses, contacts and prescription sunglasses, says Miller, whose site has a detailed list of HSA-eligible items.

Telehealth and coronavirus testing without a deductible. HSA-eligible health insurance policies must have a deductible of at least $1,400 for self-only coverage, or $2,800 for family coverage in 2020. Generally, all expenses must be subject to the deductible except for certain preventive-care costs. But HSA-eligible policies can now cover coronavirus testing and telehealth services without being subject to the deductible, too. Federal law requires insurers to cover coronavirus testing without any cost-sharing, but it’s up to insurers to decide whether or not to waive the deductibles for telehealth services. This flexibility to provide first-dollar coverage for telehealth is temporary – it applies to HSA-eligible policies that begin their plan year before Dec. 31, 2021.

Tax-free HSA withdrawals for health insurance premiums when you’re unemployed. Most health insurance premiums aren’t HSA-eligible expenses, but there’s a timely exception: You can withdraw money tax-free from the HSA for premiums if you’re receiving unemployment benefits. Keep records of the dates when you started and stopped receiving unemployment benefits to provide evidence that the premiums are eligible expenses. You can also withdraw money tax-free from an HSA to pay COBRA health insurance premiums, even if you aren’t receiving unemployment benefits (COBRA is a federal law that lets you continue your employer’s health coverage for up to 18 months after losing your job, if your company has 20 or more employees). These rules aren’t new, but they can help people who lost their jobs recently.

Extra time to contribute to an HSA for 2019. When the IRS extended the 2019 tax filing deadline until July 15, 2020, it also extended the deadline to make HSA contributions. If you had an HSA-eligible health insurance policy in 2019 with a deductible of at least $1,350 for self-only coverage or $2,700 for family coverage – whether you had coverage through your employer or on your own – you still have time to contribute to an HSA. You can contribute up to $3,500 for 2019 if you had self-only coverage, or $7,000 for family coverage, plus an extra $1,000 if you were 55 or older. Your contribution amount may be prorated if you only had an HSA-eligible policy for part of 2019.

The extended deadline can be valuable to individuals who can afford to set aside more dollars for emergencies or long-term savings, says David Speier, managing director of benefits accounts at Willis Towers Watson, an employee benefits consulting firm. And even if you worry that you can’t afford to contribute to an HSA during this difficult financial time, consider that you can benefit from the tax deduction and start using the money tax-free for eligible expenses right away, such as for health insurance premiums if you’re receiving unemployment benefits or COBRA premiums, in addition to other out-of-pocket medical expenses. “Any money you can put in th
e HSA has an immediate tax benefit,” says Speier. “You could simply pay those expenses out of your pocket, or you could funnel it through the HSA and then take it out tax-free.”

A strategy to get bigger tax benefits. Expanding the definition of HSA-eligible expenses can help people who need to access the money now. “Given the financial situation of many people, being able to use the HSA as a spending account in the near term is helpful,” says Speier. But you’ll get an even bigger tax benefit if you can use other cash for your HSA-eligible expenses and let the money grow tax-deferred in the HSA for the future (you can usually invest your HSA money in mutual funds for the long term, in addition to a savings account). There’s no time limit for withdrawing the money tax-free for any eligible expenses you incurred since you opened the health savings account – even if it’s years in the future.

Because of this rule, it’s a good idea to keep receipts for any HSA-eligible expenses you pay with other cash so you can take that money from the account without taxes or penalties later on. “Your HSA can become like a reserve fund for you,” says Begonya Klumb, head of HSAs for Fidelity. “As long as you have qualified medical expenses, you can always reimburse yourself for those expenses with HSA dollars anytime.”

Keep track of any money you pay for over-the-counter drugs or menstrual supplies you bought after Jan. 1, 2020, as well as other HSA-eligible drugstore items, co-payments, deductibles, prescription drugs and other eligible expenses you paid since you opened the account. If you’re receiving unemployment benefits or on COBRA, keep track of how much you pay in premiums during that time. If you don’t withdraw the money from the HSA for those expenses now, you can always tap the account tax-free for them later. Some HSA administrators, like Fidelity, offer tools that make it easier for account holders to organize receipts from eligible medical expenses and identify which ones they paid with money from the HSA and which they paid in cash and haven’t been reimbursed yet from the HSA.

“The tool that we give our customers access to allows you to keep those receipts forever,” says Klumb. “You never know when you might need them.”