Health Savings Account (HSA)

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What are Health Savings Accounts (HSAs)?

Health savings accounts are tax-favored accounts that can be contributed to by or on behalf of eligible individuals covered by certain high deductible health plans (HDHPs) to pay for certain medical expenses of eligible individuals and their spouses and/or tax dependents.

An individual with a high deductible health plan (HDHP) can make contributions up to certain limits and get an “above the line” taxed deduction. This means that contributions reduce the individual’s gross income before itemized or standard deductions are considered. Investment earnings on HSA funds are generally tax-free. HSA funds withdrawn for qualified medical expenses escape federal taxation entirely.

Employers that contribute to HSA’s or offer HSA’s under a cafeteria plan get a federal tax deduction for those contributions. Employer contributions are treated as employer business expenses and are not includable in an employee’s gross wages. These contributions are not subject to the normal payroll taxes such as FICA or FUTA.

Who qualifies for an HSA?

An individual must be covered under a qualifying high deductible health plan to be eligible to contribute to an HSA. An individual may not be enrolled in Medicare and cannot be claimed as a tax dependent by another taxpayer.

How does one establish an HSA?

The first step in establishing an HSA is to find a qualified trustee or custodian and complete an HSA trust or custodian agreement/application. An HSA trustee or custodian must be an insurance company, a bank or other entity approved by the IRS.

If there is a balance in the HSA account at the time of an account holder’s death, that balance will be passed to his or her designated beneficiary. Therefore, a beneficiary designation form must be signed at the time the account is established.

Once an HSA has been established, the amount of the contribution should be determined. This is an indexed amount that will change from year to year. For the most current information please refer to the list below or visit IRS.gov publication 15-B for more information.

Historical HSA Contribution Limits

  • 2016 – $3,350 / $6,750 – $1,000 catch-up
  • 2017 – $3,400 / $6,750 – $1,000 catch-up
  • 2018 – $3,450 / $6,900 – $1,000 catch-up

HSA participants will also have to decide where they would like to deposit their contributions. Subject to certain restrictions these funds may be invested in a number of investment types such as bank accounts, certificates of deposits and mutual funds.

Individuals participating in an HSA account should be careful not to pledge any portion of the HSA as security for a loan. If any amount of the HSA is pledged as security for a loan, the amount of the pledge is treated as a taxable distribution. The 10% excise tax applicable to distributions not used for qualified medical expenses will also apply.

HSA account holders are also responsible for determining whether HSA distributions are used for qualified medical expenses and should maintain appropriate records to establish their eligibility as a qualified medical expense.

 

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Health Savings Account (HSA) Maximum Contribution Calculator

 

Health Savings Account (HSA) Rules

The following guidelines are established by the IRS for Health Savings Accounts (HSA).

Basic Rules

Ownership: The HSA account belongs to you (not your employer) and is portable if you change jobs.

Changes: You can change or cancel your contribution amount at your discretion.

Roll-forward: All funds remain in the account from year to year. There are no “use it or lose it” rules for HSAs.

Eligibility: If you meet the following criteria, you may be eligible to deposit money in an HSA:

  1. You are enrolled in a qualified high deductible health plan (HDHP)
  2. You cannot be claimed as anyone’s dependent.
  3. You are not covered by any non-qualified plans.

These eligibility rules determine if you can contribute to your HSA account, not if you can spend your HSA money.

Non-Qualified Plans

A non-qualified plan is any medical plan that does not meet HDHP requirements. Coverage under any other medical plan (primary or secondary/dependent coverage) will make you ineligible for an HSA plan. Three important details:

  1. Always check with your insurance provider to see if your plan is HSA compatible.
  2. Spouse coverage can affect your eligibility. If your spouse is enrolled in any medical plan, verify that you are not covered on their plan(s). Some plans cover spouses by default and could make you ineligible to contribute to an HSA plan.
  3. There are many commonly overlooked non-qualified plans. A few examples include:
  • Medicare
  • Medicaid
  • Tri-Care
  • VA Benefits*
  • Flexible Spending Accounts (FSA)
  • Health Reimbursement Arrangement (HRA)
  • Medical Reimbursement Plan (MRP)

*If you haven’t received Veteran’s benefits in the last three months, you can contribute to an HSA plan.

Contributions

For 2018, you can contribute the following amounts:

  • $3,450 if you have self-only coverage
  • $6,900 if you have family coverage

For those 55 and older, an additional $1,000 “catch-up” contribution is allowed.

If you join an HDHP mid-year, there are special rules about how much you can contribute. To avoid possible complications, we recommend pro-rating your HSA contribution to not exceed the following monthly amounts:

  • $287.50 (1/12 of $3,450) if you have self-only coverage
  • $575 (1/12 of $6,900) if you have family coverage

So if you join an HDHP on October 1st, your HSA contributions should not exceed:

  • $862.50 if you have self-only coverage
  • $1,725 if you have family coverage

You are allowed to contribute more than the pro-rated amounts, but there can be negative tax consequences if your HSA eligibility changes.

Eligible/Ineligible Expenses

Eligible Expenses

Eligible medical expenses are defined by the IRS in Section 213(d).  Most medical, dental, and vision expenses used to treat a medical condition are eligible. These expenses can be for you, your spouse or your dependents even if they are not covered on your HDHP.

A few examples are:

  • Copays
  • Deductibles
  • Co-insurance
  • Office Visits
  • Dental Cleanings
  • Glasses
  • Contacts

Ineligible Expenses

All ineligible HSA distributions are taxable as income and subject to additional tax penalties so it is very important to know what is eligible and what is not eligible.  A few examples of ineligible expenses include:

  • Health insurance premiums (other than COBRA and select Medicare plans)
  • Non-medical expenses
  • Cosmetic procedures (teeth whitening, cosmetic surgery, etc …)
  • Medicare supplement insurance premiums
  • Expenses reimbursed from any other source


FAQs about Health Savings Account (HSA)

Questions pertaining to health savings accounts (HSA)

Am I eligible for an HSA?

If you meet the following criteria, you are eligible to deposit money in an HSA:

  1. You are enrolled in a qualified high deductible health plan (HDHP).
  2. You cannot be claimed as anyone’s dependent.
  3.  You are not covered by any non-qualified plans.

These eligibility rules determine if you can add to your HSA account, not if you can spend your HSA money. This is a handy feature should your eligibility change in the future.

How are contributions made to my HSA account?

Contributions can be made by you, your employer or both. However, the total contributions are limited annually. There are two ways you can contribute to your HSA account:

  1. Do the paperwork – send your contribution to the bank. You’ve paid taxes on this money already so you’ll have to deduct this amount when you file your taxes.
  2. Skip the paperwork – Avoid the taxes and have your employer deduct your contribution pre-tax from your paycheck. They will forward your contribution to the bank. Your contributions are tax-free so there’s no need to worry about deducting on your taxes.
How much can I contribute to an HSA?

For 2018, you can contribute the following amounts:

  • $3,450 if you have self-only coverage
  • $6,900 if you have family coverage
  • For those 55 and older, an additional $1000 “catch-up” contribution is allowed.

If you join an HDHP mid-year, there are special rules about how much you can contribute. To avoid possible complications, we recommend pro-rating your HSA contribution to not exceed the following monthly amounts:

  • $287.50 (1/12 of $3,450) if you have self-only coverage
  • $575 (1/12 of $6,900) if you have family coverage

So if you join an HDHP on October 1st, your HSA contributions should not exceed:

  • $862.50 if you have self-only coverage
  • $1,725 if you have family coverage

You are allowed to contribute more than the pro-rated amounts, but there can be negative tax consequences if your HSA eligibility changes.

What expenses are eligible?

Eligible medical expenses are defined by the IRS in Section 213(d) and are listed in IRS Pub 502. Most medical, dental, vision and over-the-counter expenses used to treat a medical condition are eligible. These expenses can be for you, your spouse or your dependents even if they are not covered on your HDHP.

A few examples are:

  • Copays
  • Deductibles
  • Co-insurance
  • Office Visits
  • Dental Cleanings
  • Glasses
  • Contacts
  • Aspirin
What expenses are not eligible?
  • Health insurance premiums (other than COBRA and select Medicare plans)
  • Non-medical expenses
  • Cosmetic procedures (teeth whitening, cosmetic surgery, etc…)
  • Medicare supplement insurance premiums
  • Expenses reimbursed from any other source

All ineligible HSA distributions are taxable as income and subject to additional tax penalties so it is very important to know what is eligible.

What is a Health Savings Account (HSA)?

An HSA is a special bank account used to pay for current and future medical expenses tax-free.

What is a High Deductible Health Plan (HDHP)?

A HDHP is a medical insurance plan that meets specific criteria set by the IRS. For 2018, a HDHP must meet the following standards:

HDHP Minimum Annual Deductible HDHP Out-Of-Pocket Maximum
Self-Only $1,350 $6,650
Family $2,700 $13,300

If you are unsure if your plan meets the HDHP requirements, check with your insurance provider.

What is a non-qualified plan?

A non-qualified plan is any medical plan that does not meet HDHP requirements. Coverage under any other medical plan (primary or secondary/dependent coverage) will make you ineligible for an HSA plan.

Three important details:

  1. Always check with your insurance provider to see if your plan is HSA compatible.
  2. Spouse coverage can affect your eligibility. If your spouse is enrolled in any medical plan, verify that you are not covered on their plan(s). Some plans cover spouses by default and could make you ineligible to contribute to an HSA plan.
  3. There are many commonly overlooked non-qualified plans. A few examples include:
  • Medicare
  • Medicaid
  • Tri-Care
  • VA Benefits*
  • Flexible Spending Accounts (FSA)
  • Health Reimbursement Arrangement (HRA)
  • Medical Reimbursement Plan (MRP)

*If you haven’t received Veteran’s benefits in the last three months, you can contribute to an HSA plan.

Why would I want an HSA?

An HSA is a way to help you save money on your medical expenses. The main advantages of an HSA are:

  • Tax Savings: An HSA account allows for tax free contributions, tax free distributions and tax free growth on accumulating balances.
  • Affordability: You may be able to lower your health insurance premiums.
  • Ownership: The account belongs to you (not your employer) and is portable if you change jobs.
  • Control: You make all the decisions about the account management including how much to put in, how much to take out and how to invest your funds.
  • Flexibility: You can change your contribution amount at your discretion. Also, all funds remain in the account from year to year. There are no “use it or lose it” rules for HSAs.