The more I talk to people, the more I realize there are many who don’t understand what a health savings account is. Consequently, this week’s blog is devoted to that subject.
What is a Health Savings Account (HSA)?
A Health Savings Account is a special type of savings account you set up with an institution who is a qualified HSA trustee, such as a bank, an insurance company, or anyone who is already approved by the IRS to be a trustee of individual retirement arrangements (IRAs). Your health savings account doesn’t have to be with your employer or with your health insurance company. You own the health savings account.
How do you qualify to have a Health Savings Account?
There are four requirements to be eligible for an HSA.
- Your health insurance coverage must be through a high-deductible health plan (HDHP) on the first day of the month. An HDHP has a higher annual deductible than typical health plans. For 2016, the minimum annual deductible for single coverage is $1,300 and $2,600 for family coverage.There is a maximum limit on your annual deductible and out-of-pocket expenses. For 2016, the maximum deductible and other other-of-pocket expenses is $6,550 for single coverage and $13,100 for family coverage.
- You cannot have any other health coverage except what is permitted.
- You cannot be enrolled in Medicare.
- No one else can claim you as a dependent on their tax return.
How does a Health Savings Account work?
First step: Set up the health savings account.
Step two: Contribute money to the account.
Step three: Use the money in the account to pay for qualified health care expenses that aren’t paid by your health insurance.
Who can make contributions to the Health Savings Account?
As long as you are eligible, you can contribute to your HSA, your employer can contribute to your HSA, even family members can contribute. Once the money is in your HSA, it is yours.
Is there a limit on how much can be contributed to the Health Savings Account?
Yes. For 2016, if you have single HDHP coverage, you (or your employer) can contribute up to $3,350. If you have family coverage, you can contribute up to $6,750. You must be eligible for each month of the year in order for you to make the maximum contribution. If you are age 55 or older, you can contribute an additional $1,000 per year.
What happens to the money if I don’t spend it all in the year it was contributed?
Unlike the money in a flex plan, the HSA is not a “use it or lose it” plan. The money is yours and you can leave it in the account for years if you want.
How can you use an HSA to save you money?
The first way you can save with the health savings account is that, in most cases, the premium on a HDHP plan is cheaper than a regular health insurance plan. That frees up money to put into your health savings account.
If your employer makes the contributions to your health savings account, you don’t have to pay taxes on that amount. For example, if your employer contributed $150 per month into your HSA, at the end of the year you would have $1,800 of tax-free money. As long as you use that money to pay for qualified health care expenses, you never have to pay tax on the contributed money or the money it earns.
If you make the contributions to your health savings account, you deduct the amount of your contributions from your gross income on your tax return. For example, let’s say your gross income is $50,000 and you contribute $5,000 to your health savings account. Now you only have to pay tax on $45,000, not $50,000, and you get to keep the $5,000 to pay for qualified medical expenses.
What happens to the HSA when you go on Medicare?
You can still own a health savings account after you apply for Medicare – you just cannot make contributions to it. You can continue to use the money in your HSA to pay for qualified medical expenses that are not paid by Medicare or other health insurance.
Is the money in the Health Savings Account ever taxed?
The only time the money would be taxed is if you took money out of the account and didn’t use it for qualified medical expenses.
Are there situations where it doesn’t make sense to have a health savings account?
If you consistently, year after year, have large medical expenses, it may be more beneficial to you to stay with a regular health insurance plan.