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Health Savings Accounts
What is a Health Savings Account (HSA)?
We like to say that an HSA is like an IRA on steroids, where the side-fund money is used to pay for your medical expenses. It is designed for the person who is willing to self insure for minor healthcare expenses by building a reserve fund to take care of expenses up to your deductible.
There are two parts to an HSA:
First, you must get an insurance policy that meets certain IRS guidelines to qualify it as a “high deductible health plan”. These HSA qualified insurance plans have minimums to the deductibles and maximums to the out-of-pocket expenses, which the IRS adjusts yearly.
Second, you open a bank account called a Health Savings Account (HSA), with either a local or an online bank that offers HSA administration. This is entirely optional and can be fully or partially funded.
Basically, the ideal is that you are setting aside money to self insure for the little stuff before you reach your deductible. The money is ready and waiting to pull out to pay for eligible medical expenses.
But here’s the kicker. The money you contribute to your HSA account is totally… tax-free! (That's right, tax-free—not simply tax deferred—so long as the money is spent on qualifying medical expenses.) The higher your tax bracket, the more you save. For example, a person in a middle-class tax bracket of 30% (25% federal plus 5% state) would save $300 in taxes for every $1000 deposited in an HSA!
That is the equivalent of getting a discount of 15 to 45%—depending on your tax bracket—on all your medical expenses due to the tax savings, all courtesy of "Uncle Sam"!
WHO IS ELIGIBLE TO OPEN AN HSA?
• Anyone who has an insurance policy that meets all IRS guidelines for a High Deductible Health Plan (HDHP), and...
• Is not on Medicare, and...
• Is not a dependent on another person's tax return, and...
• Does not have a second comprehensive insurance policy.
Big tax savings! "Triple Tax Advantage!"
HSA's are widely considered as one of the best, if not the best, tax advantaged product available to the average tax consumer. It is known as a "Triple Tax Advantaged" investment—it simply does not get any better! Here are your tax benefits:
- An immediate, "above the line", pre-tax deduction. (Just like a regular IRA.)
- Tax-free interest on your HSA. (Just like a Roth IRA)
- Tax-free withdrawals on qualifying medical expenses. (Just like a Roth IRA)
Do you begin to see why an HSA is so powerful? It combines the best of both a regular IRA and a Roth IRA.
In fact, if you can't afford to fund both your IRA and an HSA, you should seriously consider replacing your IRA or Roth contributions with an HSA. Please consult your tax advisor prior to making any decisions.
Expanded definition of medical services!
You can use pre-tax dollars from your HSA account to pay for items not normally covered by health insurance plans such as dental, orthodontia, vision, LASIK and alternative medicine such as chiropractic and acupuncture treatments!
Naturally, the usual stuff is also eligible for reimbursement. This includes office visits, lab & x-rays, prescription drugs, emergency room and surgery.
Here is a link for a more complete list of eligible expenses. The definition of what counts as an eligible expense does get updated from time to time, so if in doubt, double check with the IRS or your accountant.
There is no “Use It or Lose It”
Any leftover money in your HSA account remains there and rolls over year to year. There is no "use it or lose it" provision at the end of the year as happens in an employer sponsored Health Reimbursement Account (HRA) or cafeteria plans. So if you stay healthy, you get to accumulate funds tax-free! This nest-egg can easily grow to over $100,000 by the time you retire, if you stay healthy!
Also if your HSA qualified insurance policy were to ever terminate, the money in the HSA bank account is still yours. No, you can’t make any new contributions, but you can continue to pull money out to reimburse yourself. IRS Form 969 explains distributions and contribution in more detail. The definition of what counts as an eligible expense does get updated from time to time, so if in doubt, double check with the IRS or your accountant.
Reimbursement for ALL Family Members
Once you have established an HSA, ALL family members may use the money in the HSA account for medical expense reimbursement, EVEN IF they are not on the insurance policy with you!
What is the maximum contribution allowed for an individual health policy?
What is the maximum contribution allowed for a family health policy?
What is the catch up contribution for those 55 and older?
** On March 2, 2018 the IRS reduced the family contribution limit from $6900 to $6850 for 2018. Then the IRS reversed that decision under Rev. Proc. 2018-27.
IRS INSURANCE POLICY GUIDELINES FOR AN HSA QUALIFYING POLICY
Penalties for Nonqualified Expenses
Those under age 65 (unless totally and permanently disabled) who use HSA funds for nonqualified medical expenses face a penalty of 20 percent of the funds used for such expenses. Funds spent for nonqualified purposes are also subject to income tax.