Health Savings Account 101
What is a Health Savings Account?
A Health Savings Account, or HSA, is tax-advantaged savings account established by an individual or family to pay for qualified medical expenses tax-free. HSAs can be opened by an individual, or offered by an employer alongside a high-deductible insurance plan. Individuals receive a 100% income tax deduction on the contribution, plus interest and dividends accumulate tax-free. When qualified medical expenses are incurred, the distributions are tax-free. An HSA is also portable, meaning that if an employee changes jobs, they can still keep their HSA.
Who is eligible for a Health Savings Account?
An eligible individual has to be enrolled in a qualified high deductible health plan, or HDHP, has no other health coverage, is not enrolled in Medicare, and is not being claimed as a dependent on someone else’s tax return. For 2020, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses can’t be more than $6,900 for an individual or $13,800 for a family.
The annual limit for HSA contributions for 2020 is $3,550 for an individual and $7,100 for family coverage. For those age 55 and over, you can contribute an additional $1,000 as a “catch-up” contribution. Contributions can also be made by your employer, which is deductible for the employer. It is important to note that employer contributions do count towards your annual contribution limit. Contributions can be made until the April tax deadline in any given year and any contributions made to an HSA do not have to be used or withdrawn during the tax year. Any unused contributions can be rolled over to the following year. Individuals who are 65 years old or older are no longer able to contribute to an HSA, unless they are still working and not enrolled in any parts of Medicare.
As long as withdrawals from a Health Savings Account are used to pay for qualified medical expenses that are not covered under the HDHP, the amount withdrawn will not be taxed. Qualified medical expenses include deductibles, dental services, vision care, prescription drugs, co-pays, psychiatric treatments, and other qualified medical expenses not covered by a health insurance plan. Insurance premiums usually don’t count towards qualified medical expenses unless the premiums are for Medicare or other healthcare coverage if 65 years or older, for health insurance while unemployed and receiving unemployment compensation, and for long-term care premiums. Medical expenses can occur now and be reimbursed later (even far later) in the future and still be qualified, as long as documentation of the medical expense is maintained and as long as the medical expense occurred after the HSA was originally established.
If any distributions are made from an HSA for reasons other than paying for medical expenses, the amount that is withdrawn will be subject to both income tax and an additional 20% tax penalty. Individuals who are 65 years old or older can withdraw any funds accumulated in the account for any expense without incurring the 20% penalty. However, income tax will still apply to any non-medical usage.
Presented by Elizabeth Schleifer