October 19, 2019 Industry News

Health savings accounts

There’s a lot of mystery surrounding Health Savings Accounts (HSAs) but the basic idea is pretty simple.  HSAs are merely another option for funding one’s health care.   Most choose a traditional approach, maintaining health insurance with a lower deductible and paying out of pocket expenses out of their monthly income or savings.  HSAs utilize a two-pronged approach by coupling a qualifying high-deductible health insurance plan with a separate HSA to which funds are contributed to cover out of pocket medical costs.  If you’re lucky enough to incur minimal health care expenses over time, you could end up with a nice sum accumulated in the HSA.   In fact, some view the HSA as an additional retirement account.  As an added benefit, contributions to the HSA are deductible, similar to IRA contributions, and earnings on those funds accumulate tax-free.

It’s easy to get bogged down in the minutiae so we’ll just list the most basic requirements/rules here:

  • To be eligible to establish an HSA, you must have a high deductible health plan. For 2020, the plan must have a minimum deductible of $1,400 for self-only coverage or $2,800 for family coverage.  Furthermore, maximum annual out of pocket expenses cannot exceed $6,900 for self-only coverage or $13,800 for family coverage.
  • For 2020, an individual can contribute up to $3,550 to an HSA coupled with self-only coverage or $7,100 for family coverage. Those who have reached age 55 before year end can make an additional catch-up contribution of up to $1,000.  Amounts must be paid by the due date for one’s tax return to be deductible on the prior year return.
  • Alternatively, HSAs can be set up and funded by an employer on a pre-tax basis.
  • Funds withdrawn from an HSA not used for qualifying expenses are subject to income tax and a 20% penalty. Importantly, the penalty does not apply if the person dies, becomes disabled, or is age 65 or older.
  • Contributions to an HSA cannot be made for one enrolled in Medicare.
  • Contributions in excess of the maximum amount deductible are subject to a 6% excise tax each year until withdrawn.
  • Contributions to an HSA can be made irrespective of whether one has compensation or earned income, unlike an IRA.
  • On a once-only basis, an amount not exceeding the maximum annual contribution can be transferred from an individual’s IRA to an HSA account.

Typically, the HSA owner is equipped with a debit card which can be used to pay medical expenses.  As long as only qualifying expenses are paid, the amounts withdrawn are tax-free.    Most people don’t receive a tax benefit for paying medical expenses, especially after the 2017 tax act increased the standard deduction.  Use of the HSA essentially results in a deduction for amounts that typically would not provide one.

Further information can be found in IRS publication 969, including the rules applicable to employer plans, which are plentiful.   And, health insurance agents are typically well-versed in setting up individual and employer plans.   We also are available to answer any questions you may have.