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In a recent newsletter, we brought up the existence of various health spending programs designed to give you tax advantages to offset other health care costs. We were referring to: Health Savings Accounts (HSAs), Medical Savings Accounts (Archer MSAs and Medicare Advantage MSAs), Health Flexible Spending Arrangements (FSAs), and Health Reimbursement Arrangements (HRAs). We dedicated the same newsletter to the FSAs.
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Today’s topic is the Health Savings Account, which is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur.
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No permission or authorization from the IRS is necessary to establish an HSA. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider. Your employer may already have some information on HSA trustees in your area. If you have an Archer MSA, you generally can roll it over into an HSA tax free.
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- You may enjoy several benefits from having an HSA.
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- You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don’t itemize your deductions on Schedule A.
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- Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
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- The contributions remain in your account until you use them.
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- The interest or other earnings on the assets in the account are tax free.
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- Distributions may be tax free if you pay qualified medical expenses.
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- An HSA is “portable.” It stays with you if you change employers or leave the work force.
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To be an eligible individual and qualify for an HSA, you must meet the following requirements:
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- You are covered under a high deductible health plan (HDHP) on the first day of the month;
- You have no other health coverage except what is permitted (usually only the HDHP;
- You aren’t enrolled in Medicare;
- You can’t be claimed as a dependent on someone else's tax return.
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| Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers). |
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| If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse's coverage doesn’t cover you. |
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| If another taxpayer is entitled to claim an exemption for you, you can’t claim a deduction for an HSA contribution. This is true even if the other person doesn’t actually claim your exemption. |
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| A high deductible health plan (HDHP) has: |
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- A higher annual deductible than typical health plans, and
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- A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. Out-of-pocket expenses include copayments and other amounts, but don’t include premiums.
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An HDHP may provide preventive care benefits without a deductible or with a deductible less than the minimum annual deductible. Preventive care includes, among others: periodic health evaluations, routine prenatal and well-child care; child and adult immunizations; tobacco cessation programs; obesity weight-loss programs, screening services, etc.
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| Self-only HDHP coverage is an HDHP covering only an eligible individual. Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual (whether or not that individual is an eligible individual). |
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| For the 2017 HDHP the minimum annual deductible for self-only coverage is $1,300 ($2,600 for family coverage). The maximum annual deductible and other out-of-pocket expenses for self-only coverage is $6,550 ($13,100 for family coverage). |
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| You (and your spouse, if you have family coverage) generally can’t have any health coverage, other than an HDHP. However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you aren’t covered by that plan. |
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| You can have additional insurance that provides benefits only for the following items: liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property; a specific disease or illness; a fixed amount per day (or other period) of hospitalization. |
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| You can also have coverage (whether provided through insurance or otherwise) for: accidents, disability, dental care, vision care, long-term care.
Each spouse who is an eligible individual who wants an HSA must open a separate HSA. You can’t have a joint HSA.
Any eligible individual can contribute to an HSA. For an employee's HSA, the employee, the employee's employer, or both may contribute to the employee's HSA in the same year.
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| For an HSA established by a self-employed (or unemployed) individual, the individual can contribute. Family members or any other person may also make contributions on behalf of an eligible individual. |
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| The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual. |
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| For 2016, if you have self-only HDHP coverage, you can contribute up to $3,350. If you have family HDHP coverage, you can contribute up to $6,750. |
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| For 2017, if you have self-only HDHP coverage, you can contribute up to $3,400. If you have family HDHP coverage, you can contribute up to $6,750. |
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| If you are an eligible individual who is age 55 or older at the end of your tax year, your contribution limit is increased by $1,000. |
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| If you have more than one HSA, your total contributions to all the HSAs cannot be more than the limits mentioned earlier. |
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| You can make contributions to your HSA for 2016 until April 18, 2017. If you fail to be an eligible individual during 2016, you can still make contributions, up until April 18, 2017, for the months you were an eligible individual. |
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| Your employer can make contributions to your HSA between January 1, 2017, and April 18, 2017, that are allocated to 2016. Your employer must notify you and the trustee of your HSA that the contribution is for 2016. The contribution will be reported on your 2017 Form W-2. |
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| Contributions made by your employer aren’t included in your income. Contributions to an employee's account by an employer using the amount of an employee's salary reduction through a cafeteria plan are treated as employer contributions. |
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| Generally, you can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income. |
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| Report all contributions to your HSA on Form 8889 and file it with your Form 1040 or Form 1040NR. You should include all contributions made for 2016, including those made by April 18, 2017, that are designated for 2016. Contributions made by your employer and qualified HSA funding distributions are also shown on the form. |
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| Excess contributions aren’t deductible. Excess contributions made by your employer are included in your gross income. If the excess contribution isn’t included in box 1 of Form W-2, you must report the excess as “Other income” on your tax return. Generally, you must pay a 6% excise tax on excess contributions. |
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You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions: (1) you withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made; (2) you withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.
Over time, if medical expenses are low and contributions are made regularly to the HSA, the account can accumulate significant assets that can be used for health care tax-free or used for retirement on a tax-deferred basis.
Generally, you will pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan. When you pay medical expenses during the year that aren’t reimbursed by your HDHP, you can ask the trustee of your HSA to send you a distribution from your HSA. |
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| You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA. If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax. You don’t have to make distributions from your HSA each year. |
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| Usually, a distribution is money you get from your HSA. Your total distributions include amounts paid with a debit card that restricts payments to health care and amounts withdrawn from the HSA by other individuals that you have designated. |
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The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA.
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| Qualified medical expenses are those expenses that generally would qualify for the medical and dental expenses deduction. A medicine or drug will be a qualified medical expense for HSA purposes only if the medicine or drug requires a prescription, is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or is insulin. |
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For HSA purposes, expenses incurred before you establish your HSA aren’t qualified medical expenses.
If you use a distribution from your HSA for qualified medical expenses, you don’t pay tax on the distribution but you have to report the distribution on Form 8889. However, the distribution of an excess contribution taken out after the due date, including extensions, of your return is subject to tax even if used for qualified medical expenses.
HSA administration and maintenance fees withdrawn by the trustee aren’t reported as distributions from the HSA.
Specialized counseling is always the best option for you to find out what kind of health spending plan or program is best suited for your personal circumstances. |
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