Health Savings Accounts offer many advantages, but also require account holders to meet and maintain certain eligibility criteria. Here we will highlight some of the frequently asked questions, advantages, and requirements of Health Savings Accounts. Everyone’s situation is different, and individuals are encouraged to seek additional information from the resources mentioned below.
Who is ELIGIBLE to open a Health Savings Account?
In order to open and contribute to a Health Savings Account you must be covered by a Qualified High Deductible Health Plan (QHD), and you cannot also be covered by a spouse’s or parent’s health plan. You also cannot be enrolled in Medicare or claimed as a dependent on someone else’s tax return during that tax year.
What are some ADVANTAGES OF CONTRIBUTING to a Health Savings Account?
Health Savings Accounts are tax-favored vehicles. By making contributions to an HSA, you can maximize the value of your healthcare dollars, save for future expenses, and have the security that the contributions will remain yours even if you change health plans or employers, or leave the workforce altogether. Amounts accumulated in your Health Savings Account are yours. The funds roll over from year to year and remain your property even if you are no longer eligible to make contributions to your Health Savings Account. Contributions made by your employer are excluded from your income – you do not pay taxes on these contributions.
HSA contributions are “triple tax-advantaged,” meaning contributions to your HSA are tax-deductible, investment income earned on your HSA is not subject to taxes, and HSA funds used to pay qualified medical expenses are not taxable. In addition, HSAs may be used for any non-medical purpose without penalty (subject to ordinary income tax rates) after the owner turns 65. This means that a HSA can be seen as a powerful long-term savings tool not only for saving for future medical expenses, but as a vehicle that offers similar benefits to a 401(k) if used for other purposes.
What is the MAXIMUM CONTRIBUTION that can be made to your Health Savings Account?
Given the favorable tax treatment of a Health Savings Account, the IRS has established contribution limits:
- Employees with single coverage in a QHD can contribute up to a maximum of $3,500 in 2019.
- Employees with non-single coverage in a QHD can contribute up to a maximum of $7,000 in 2019.
- These maximums include ALL contributions made to your Health Savings Account. The contribution made by your employer is applied toward the limit.
- Individuals age 55 and older are eligible to make additional contributions of up to $1,000.
- It is very important employees both understand and adhere to the IRS contribution limits – excess contributions can result in tax penalties. See IRS Publication 969 and the Instructions to IRS Form 8889 for more information.
What types of EXPENSES can I pay from my Health Savings Account?
Health Savings Accounts can be used to pay qualified medical expenses without being subject to taxation. IRS Publication 502 details eligible expenses. Some eligible expenses include:
- Amounts paid by you toward your deductible
- Office visit and Prescription drug copayments
- Most dental and vision expenses
You can use your HSA to pay expenses incurred by
- Your spouse
- Dependents claimed on your tax return
- Certain other dependents, subject to satisfying certain criteria.
Employees should maintain DOCUMENTATION in the event of an IRS audit.
Maintaining documentation is important, as the use of HSA funds for expenses other than qualified medical expenses has tax consequences. If an HSA is used to pay or reimburse non-qualified expenses, the amount is subject to taxation as ordinary income AND incurs an additional 20% penalty if you are not at least age 65. Consult the IRS resources for additional information.
Documentation must prove:
- That the expense was a qualified medical expense.
- That the expense was not paid or reimbursed from another source.
- That the expense was not taken as an itemized deduction in any tax year.
Interested in how HSA’s can improve your healthcare benefit offerings? Reach out to our healthcare team!