Health Savings Account
A health savings account is an account that you can put money into to save for future medical expenses. There are certain advantages to putting money into these accounts, including favorable tax treatment. HSAs were signed into law by President Bush on December 8, 2003.
Who Can Have an HSA?
Any adult can contribute to an HSA if he/she:
- Has coverage under an HSA-qualified "high deductible health plan" (HDHP)
- Has no other first-dollar medical coverage (other types of insurance like specific injury or accident, disability, dental care, vision care, or long-term care insurance are permitted)
- Is not enrolled in Medicare
- Cannot be claimed as a dependent on someone else’s tax return
Contributions to your HSA can be made by you, your employer, or both. However, the total contributions are limited annually.
If you make a contribution, you can deduct the contributions (even if you do not itemize deductions) when completing your federal income tax return.
Contributions to the account must stop once you are enrolled in Medicare. However, you can keep the money in your account and use it to pay for medical expenses tax-free.
High Deductible Health Plans
You must have coverage under an HSA-qualified "high deductible health plan" (HDHP) to open and contribute to an HSA. Generally, this is health insurance that does not cover first-dollar medical expenses. Federal law requires that the health insurance deductible be at least:
Self-only coverage: $1,150 / $1,200*
Family coverage: $2,300 / $2,400*
In addition, annual out-of-pocket expenses under the plan (including deductibles, copays, and coinsurance) cannot exceed:
Self-only coverage: $5,800 / $5,950*
Family coverage: $11,600 / $11,900*
In general, the deductible must apply to all medical expenses (including prescriptions) covered by the plan. However, plans can pay for "preventive care" services on a first-dollar basis (with or without a copay). Preventive care can include routine prenatal and well-child care, child and adult immunizations, annual physicals, mammograms, and more.
You can make a contribution to your HSA each year that you are eligible. You can contribute no more than:
Self-only coverage: $3,000 / $3,050*
Family coverage: $5,950 / $6,150*
Individuals ages 55 and older can also make additional "catch-up" contributions. The maximum annual catch-up contribution is $1,000.
Determining Your Contribution
Your eligibility to contribute to an HSA is determined by the effective date of your HDHP coverage. Individuals that are eligible to contribute to an HSA in the last month of the taxable year are allowed to contribute an amount equal to the annual HSA contribution amount provided they remained covered by the HSA for at least the 12-month period following that year. Contributions can be made as late as April 15 of the following year.
Using Your HSA
You can use the money in the account to pay for any "qualified medical expense" permitted under federal tax law. This includes most medical care and services, dental and vision care, and over-the-counter (OTC) drugs such as aspirin.
You can generally not use the money to pay for medical insurance premiums, except under specific circumstances, including:
- Any health plan coverage while receiving federal or state unemployment benefits
- COBRA continuation coverage after leaving employment with a company that offers health insurance coverage
- Qualified long-term care insurance
- Medicare premiums and out-of-pocket expenses, including deductibles, copays and coinsurance for:
- Part A (hospital and inpatient services)
- Part B (physician and outpatient services)
- Part C (Medicare HMO and PPO plans)
- Part D (prescription drugs)
You can use the money in the account to pay for medical expenses for yourself, your spouse, or your dependent children. You can pay for expenses of your spouse and dependent children even if they are not covered by your HDHP. Any amounts used for purposes other than to pay for qualified medical expenses are taxable as income and subject to an additional 10 percent penalty. Examples include:
- Medical procedures and expenses not considered "qualified" under federal tax law (i.e., cosmetic surgery)
- Other types of health insurance unless specifically described above
- Medicare supplement insurance premiums
- Expenses not medical or health-related.
After you turn 65, the 10 percent additional tax penalty no longer applies. If you become disabled and/or enroll in Medicare, the account can be used for other purposes without paying the additional penalty.
Advantages of HSAs
Security - Your high deductible insurance and HSA protect you against high or unexpected medical bills.
Affordability - You should be able to lower your health insurance premiums by switching to health insurance coverage with a higher deductible.
Flexibility - You can use the funds in your account to pay for current medical expenses, including expenses that your insurance may not cover, or save the money in your account for future needs, such as:
- Health insurance or medical expenses if unemployed
- Medical expenses after retirement (before Medicare)
- Out-of-pocket expenses when covered by Medicare
- Long-term care expenses and insurance
Savings - You can save the money in your account for future medical expenses and grow your account through investment earnings.
Control - You make all the decisions about:
- How much money you will put in the account
- Whether to save the account for future expenses or pay current medical expenses
- Which medical expenses to pay from the account
- Which company will hold the account
- Whether to invest any of the money in the account
- Which investments to make
Portability - Accounts are completely portable, meaning you can keep your HSA even if you:
- Change jobs
- Change your medical coverage
- Become unemployed
- Move to another state
- Change your marital status
Ownership - Funds remain in the account from year to year, just like an IRA. There are no "use it or lose it" rules for HSAs.
Tax Savings - An HSA provides you triple tax savings:
- Tax deductions when you contribute to your account;
- Tax-free earnings through investment; and
- Tax-free withdrawals for qualified medical expenses.
What Happens to My HSA When I Die?
- If you are married, your spouse becomes the owner of the account and can use it as if it were his/her own HSA.
- If you are not married, the account will no longer be treated as an HSA upon your death. The account will pass to your beneficiary or become part of your estate (and be subject to any applicable taxes).
Opening Your Health Savings Account
Banks, credit unions, insurance companies and other financial institutions are permitted to be trustees or custodians of these accounts. Other financial institutions that handle IRAs or Archer MSAs are also automatically qualified to establish HSAs. If you cannot locate a local institution willing to establish your account, try visiting www.hsainsider.com, a link recommended by the U.S. Department of the Treasury.
Need More Information about HSAs?
The Treasury’s Web site has additional information about health savings accounts, including answers to frequently asked questions, related IRS forms and publications, technical guidance and links to other helpful Web sites. You can visit www.treas.gov and click on "Health Savings Accounts" (on the left-hand side), or go directly to the page at www.treas.gov/offices/public-affairs/hsa.