A health savings account (HSA) is a savings account maintained to help you pay for current or future medical expenses. There are certain advantages to putting money into an HSA, including favorable tax treatment.
You can have an HSA if you:
Contributions to your health savings account can be made by you, your employer or both. However, the total contributions are limited annually. Contributions to an HSA are tax-deductible (even if you do not itemize deductions). Your employer may allow you to make your HSA contributions as tax-free salary reductions.
Contributions to the account must stop once you are enrolled in Medicare. However, you can still use your HSA funds to pay for medical expenses tax-free.
In order to be eligible to have an HSA, you must be covered by a high deductible health plan (HDHP). An HDHP is a health insurance plan that has a higher deductible than a normal health insurance plan. The deductibles under an HDHP must be at least:
In addition, annual out-of-pocket expenses under an HDHP (including deductibles, copays and coinsurance) cannot exceed the following limits:
In general, an HDHP’s 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. 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:
Individuals ages 55 and older can also make additional “catch-up” contributions of up to $1,000 annually.
Your eligibility to contribute to an HSA is determined by the effective date of your HDHP coverage. Individuals who become eligible to contribute to an HSA in the last month of a taxable year are allowed to contribute an amount equal to the annual HSA contribution amount for that taxable year. However, they must remain covered by the HDHP for at least the 12-month period following that year. Contributions for a given tax year can be made as late as April 15 of the following year.
You can use money in your health savings account to pay for any qualified medical expense permitted under federal tax law. This includes most medical care and services, dental and vision care.
Generally, you cannot use your HSA to pay for medical insurance premiums, except specific instances, including:
You can use your HSA to pay for medical expenses for yourself, your spouse or your dependent children, even if your dependents 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 20% penalty. Examples include:
After you turn 65, the 20% 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.
Security – Your HSA can provide a buffer for unexpected medical bills.
Affordability – In most cases, health insurance premiums for an HDHP will be less than premiums for a health insurance coverage with a lower deductible.
Flexibility – You can use your HSA to pay for current medical expenses, including expenses that your insurance may not cover, or save your funds for future needs, such as:
Savings – You can save the money in your HSA for future medical expenses and grow your account through investment earnings.
Control – You make the decisions regarding:
Portability – Accounts are completely portable, meaning you can keep your HSA even if you:
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:
If you are married, your spouse becomes the owner of the account and can use it as if it were his or 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).
Banks, credit unions, insurance companies, and other financial institutions are permitted to be trustees or custodians of an HSA.
Other financial institutions that handle IRAs are also automatically qualified to establish HSAs.
To learn more about health savings accounts, contact a health professional at RMC Group today 239-298-8210 or [email protected].
This Know Your Benefits article is provided by RMC Group and is to be used for informational purposes only and is not intended to replace the advice of an insurance professional. © 2020-2021 Zywave, Inc. All rights reserved.