Savings

Health Savings Accounts Q&A's

 

What are Health Savings Accounts (HSAs)?

HSAs are individually-owned accounts which allow you to make tax-deductible contributions, accumulate earnings on a tax-deferred basis, and withdraw money tax free to pay for qualified medical expenses. Any unused funds remain in the account, so there’s no “use it or lose it” stipulation.

Similar to IRAs, HSA funds can be invested in most types of saving and investments, including CDs/share certificates, share savings, stocks, bonds, and mutual funds. You cannot invest in life insurance or collectibles - including artwork, stamps, antiques, and some coins. And since you own the account, it is fully portable regardless of any job changes.

HSAs are designed for individuals who have chosen a high-deductible health plan (HDHP). The funds in your HSA can be used tax-free to pay for qualified medical expenses.

What is a high-deductible health plan (HDHP)?

An HDHP is a health plan that meets tests that vary with the type of coverage:

Year Type of Coverage Minimum Deductible Maximum Out-of-Pocket Expenses
2015 Individual Plan $1,300 $6,450
  Family Plan $2,600 $12,900
2016 Individual Plan $1,300 $6,550
  Family Plan $2,600 $13,100

These thresholds will be adjusted for inflation in future years. If you are covered by a prescription drug benefit plan, you are not eligible for an HSA unless this plan is part of the HDHP or it doesn't provide benefits until the minimum annual deductible of the HDHP has been satisfied.

Participation in a health reimbursement arrangement (HRA) or a flexible spending account (FSA) usually prevents you from contributing to an HSA, although this is not true if the HRA or FSA is properly coordinated with an HSA.

The HDHP policy does not have to be in your name for you to be eligible for an HSA. As long as you are covered by an HDHP policy (for example, by a policy funded by your spouse’s employer), you can be eligible for an HSA, assuming you meet the other eligibility requirements for contributing to an HSA.

What are the contribution limits?

Since 2007, Health Savings Account (HSA) contributions are no longer limited to the amount of the deductible of the High Deductible Health Plan (HDHP) and are instead tied to just the annual contribution limit of your type of health plan. 

Guidelines

Year Type of Coverage Minimum Deductible Maximum Out-of-Pocket Expenses
2015 Individual Plan $1,300 $6,450
  Family Plan $2,600 $12,900
2016 Individual Plan $1,300 $6,550
  Family Plan $2,600 $13,100

For 2015 & 2016 an additional $1,000 catch-up contribution can be made if you are at least age 55 or older and are not enrolled in Medicare. 

Am I eligible to contribute to an HSA?

You are eligible to contribute to a Health Savings Account (HSA) if you are:

  • Covered by a qualified high-deductible health plan (HDHP)
  • Not enrolled in Medicare
  • Not receiving or have received veterans medical benefits in the previous three months
  • Not claimed as a dependent on someone else’s tax return

Your eligibility to contribute to an HSA is determined on the first day of every month. If you meet the eligibility test on that day, you can contribute for that month. Your monthly contribution limit is calculated by dividing the annual contribution limit by 12, or by dividing the annual deductible of your high-deductible health plan (HDHP) by 12, whichever is less. If you are over age 55, then your monthly limit is increased by 1/12th of the catch-up contribution for the year. The maximum HSA contribution which can be made on your behalf for a year is the total of your monthly limits.
 

Can I make contributions to an HSA without an HDHP?

No, you must enroll in an HDHP before you can begin making HSA contributions. Once your HSA is open, you can make contributions or transfer funds into the account. An employer can also make a contribution on behalf of an employee.

Switching to a high-deductible health plan (HDHP) will lower your monthly premiums, which you or your employer can view as providing a source for making Health Savings Account (HSA) contributions. You can use this money for paying the deductible when qualified health expenses arise. And any unused funds can accumulate with tax-deferred earnings and be used tax-free to pay for qualified medical expenses in future years.

What are the rules around removing funds from an HSA?

As an HSA owner, you can request distributions at any time and can use distributions for qualified medical expenses tax-free. HSA distributions can be used to cover qualified medical expenses for most types of medical care for you, your spouse, and your dependents, but only to the extent that such amounts are not covered by insurance or another health plan.

Do I have to use my HSA funds on medical expenses?

No, but HSA distributions not used for qualified medical expenses since the HSA was established are subject to federal income tax and a 10% penalty. The penalty is waived if the account owner is disabled, at least 65 years old, or the distribution is made after the owner's death.

You’re considered permanently disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. To qualify for this exception, a physician must determine that your condition can be expected to result in death or to be of long, continued and indefinite duration.

What about tax reporting?

HSA owners are required to report tax-deductible contributions and distributions on IRS Form 8889 and include it with their tax return.

What happens to my HSA funds after I die?

If your spouse receives your HSA following your death, then it becomes your spouse's HSA to use for his or her medical expenses. If anyone else receives it, then the HSA must be distributed to your beneficiary and it is then considered taxable income (although it is not subject to the 10% penalty tax).

In summary, what are the main benefits of HSAs?

Protection – You will have an opportunity to save money to pay high or unexpected medical bills.

Affordability – High health insurance policy deductibles mean lower premiums.

Savings – Your ability to deduct your contributions and the tax deferral of account earnings enable you to build your account.

Flexibility – You can contribute at any time during the year, and your HSA balance rolls over from year to year.

Portability – You own the account, so it goes where you go, regardless of any job changes.

 

ACU does not offer tax advice, the above Q&A is provided for informational purposes only. Please consult a tax professional regarding details on HSA's.