Mike's Blog
Health Savings Accounts (HSAs) allow people who have high-deductible health plans to save and pay for health-care expenses tax free. HSAs can be established by any qualified person covered by a high deductible health plan (HDHP).
So who can establish an HSA?
Generally, if you are covered under an HDHP, you’re eligible to establish an HSA.
For 2015, a qualifying HDHP:
(1) Has an annual deductible of at least $1,300 for single coverage or $2,600 for family coverage and
(2) Limits annual out-of-pocket expenses (e.g. co-pays, deductibles) to $6,450 for individual coverage or $12,900 for family coverage.
You are not eligible to open an HSA, even if you are covered under an HDHP, if any of the following apply:
- You’re already covered by a non-HDHP plan
- You can be claimed as a dependent on another person's income tax return.
- You’re enrolled in Medicare.
When it comes to contributions…
You, your eligible family members, or others who just want to for whatever reason, can make contributions to your HSA. If you're employed, your employer may also make contributions to your HSA. However, you can make NO contributions to your HSA once you retire.
For tax year 2015, the contribution limit is $3,350 for individual coverage or $6,650 for family coverage.
If you’re age 55 or older, you can make an additional catch-up contribution of $1,000. Just remember, no regular or catch-up contributions can be made once your age 65 and are enrolled in Medicare.
Your contributions also can earn interest.
You can invest in savings or investment options depending on what’s offered by the custodian of your HSA. Any earnings grow tax deferred until taken out, and then will be tax free if you use it to pay qualified medical expenses.
When it comes to taxes…
Individual contributions are tax deductible on your federal income tax return. It’s an "above-the-line" deduction too so you can deduct HSA contributions even if you don't itemize. You can even deduct contributions made by family members on your behalf! Maybe you should re-read that Dale Carnegie book!
Money used from your HSA for qualified medical expenses for you, your spouse, and your dependents are not taxable. Distributions for NON-qualified expenses are considered taxable income and might get hit with an additional 20 percent penalty tax.
The 20% penalty does not apply in the case of death, disability, or reaching age 65.
What are qualified medical expenses?
These can include lab fees, prescription and nonprescription drugs, dental, ambulance service, eyeglasses, and hearing aids, just to name a few. HSA funds also cover health insurance deductibles and co-payments.
For a list of qualified medical expenses, see IRS Publication 502.
Are transfers or rollovers between custodians allowed?
Some rollovers are permitted, such as money from an old Archer Medical Savings Account (MSA) to an HSA, and you can roll over funds from one HSA to another. The funds must be rolled within 60 days to avoid that nasty 20 percent penalty. Don’t trip that penalty!
You might also be able to roll over funds from your IRA to your HSA. But don’t get too excited, it’s allowed only once during your lifetime and the amount you roll can't exceed the annual contribution limit for that year. It ends up not being much.
What happens to funds remaining in your HSA?
HSAs are not a "use it or lose it" type of account. Funds remaining in your account at the end of the year are not forfeited and can continue to grow tax free year after year until withdrawn.
If you retire
You can no longer open or make contributions to an HSA once you reach age 65 and are enrolled in Medicare. But you can continue to use the money tax-free to pay for medical expenses.
If you die
Funds in your HSA become the property of your beneficiary. If the beneficiary is your spouse, he or she becomes the account owner and it remains an HSA.
If the beneficiary is not your spouse, the account ceases to be an HSA, and the funds are includable in your beneficiary's gross income.
So now you can tell all your friends about an HSA and how they work! As always for more info go to our website or call our office for more information.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.