Health Savings Accounts (HSAs) are accounts individuals can use to set aside money to help cover medical expenses associated with High Deductible Health Plans.
What is a Health Savings Account?
A Health Savings Account (HSA) is an account created for individuals with High Deductible Health Plans (HDHP) to save for medical expenses that those plans do not cover.
Health Savings Accounts were created in 2003 so that individuals covered by a High Deductible Health Plan could save taxes on money set aside for medical expenses.
♦ An adult who is covered by a HDHP may establish an HSA.
How does an HSA work?
The Treasury Department and the IRS have published a number of documents to help consumers understand Health Savings Accounts.
IRS publication 969 titled: Health Savings Accounts and Other Tax-Favored Health Plans explains a lot of the tax requirements related to an HSA.
Publication 969 can be downloaded from the IRS website.
Below are excerpts from Publication 969.
• A Health Savings Account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA.
• You do not need approval from the IRS to establish an HSA. You do need to set up an HSA with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs.
• The HSA can be established through a trustee that is different from your health plan provider.
• Your employer may already have some information on HSA trustees in your area.
What are the benefits of an HSA?
HSA benefits you may receive:
- You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you do not itemize your deductions on Form 1040.
- Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
- The contributions remain in your account until you use them.
- The interest or other earnings on the assets in the account are tax free.
- Distributions may be tax free if you pay for qualified medical expenses.
- The money in the account belongs to you, not your employer.
- The funds are portable. If you change jobs the money remains yours.
- The funds can be used even after your retire. But you cannot contribute any more funds after your enroll in Medicare.
Qualifying for a Health Savings Account (HSA)
To be an eligible individual and qualify for an HSA, you must meet the following requirements.
♦ You must be covered under a High Deductible Health Plan (HDHP).
• In 2023, the HDHP must have a minimum annual deductible of:
$1,500 Individual — $3,000 Family.
• In 2023, the HDHP is allowed to have a maximum out-of-pocket up to:
$7,500 Individual — $15,000 Family.
♦ In addition:
- You have no other health coverage except what is permitted under Other Health Coverage.
- You are not enrolled in Medicare. You can contribute up to the first month you enroll in Medicare.
- You cannot be claimed as a dependent on someone else's tax return.
Other health coverage
You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP.
However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan.
You can have additional insurance that provides benefits only for the following items:
- Liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property.
- A specific disease or illness.
- A fixed amount per day (or other period) of hospitalization.
You can also have coverage (whether provided through insurance or otherwise) for the following items:
- Dental care
- Vision care
- Long-term care
Contributions to a Health Savings Account (HSA)
Any eligible individual can contribute to an HSA. For an employee's HSA, the employee, the employee's employer, or both may contribute to the employee's HSA in the same year.
• For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. Family members or any other person may also make contributions on behalf of an eligible individual.
Contributions to an HSA must be made in cash. Contributions of stock or property are not allowed.
Contribute to both an HSA and an FSA?
In most cases, you can't contribute to both an HSA and a Flexible Spending Account (FSA) in the same year.
However, there is a special type of FSA called a limited-purpose FSA which may permit contributing to both. These FSAs are limited to only certain expenses, such as dental and vision costs.
♦ The FSA must be specifically designated as an "HSA-compatible FSA." If you are considering such an account be sure to check with your employer and understand all rules and limitations.
HSA contribution limit
The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual.
♦ In 2023, if you have self-only HDHP coverage, you can contribute up to $3,850. If you have family HDHP coverage you can contribute up to $7,750.
♦ HSA catch-up contributions remains at $1,000 for people over the age of 55. Catch-up contributions can be made in the year you turn 55.
The IRS has a lot of rules when it comes to determining contribution limits. There are also rules for reporting HSAs on your taxes. You are encouraged to read Publication 969 in its entirety. Please seek professional assistance in setting up your HAS and reviewing your situation.