Health Savings Accounts - FAQ's
Health Savings Accounts (HSAs) are investment accounts designed to help individuals save for qualified medical and retirement health expenses (as defined by the IRS) on a tax-advantaged basis. Any adult who is covered by a qualified high deductible health plan (HDHP), and is not covered by any other plan that provides any of the same benefits as the qualified HDHP, may establish an HSA. Created by the Medical Prescription, Improvement and Modernization Act of 2003, and signed by President Bush on December 8, 2003, HSAs are designed to help individuals save for qualified medical and retirement health expenses as well as for businesses to be able to provide affordable health insurance plans with income tax benefits.
HSAs are portable, the account can travel with an employee from job to job, and funds can accumulate without the annual use-it-or-lose-it requirement of a Flexible Spending Account, enabling contributions and earnings to accrue tax-free, just like an Individual Retirement Account (IRA). Funds distributed from the HSA are not taxed if they are used to pay qualified medical expenses.
Anyone covered by a high-deductible health plan who is not covered by another health insurance plan, including Medicare, and is not claimed as a dependent on another person's tax return is eligible to establish an HSA. In 2018, qualified high-deductible health plans are those with a minimum deductible of $1350 for individuals (annual deductible plus out-of-pocket expenses cannot exceed $6650) or $2700 for families (annual deductible plus out-of-pocket expenses cannot exceed $13,300).
HSAs are often advantageous for the self-employed and for sole proprietors because:
- High-deductible health insurance plans generally have modest premium costs.
- The individual is protected against potentially catastrophic healthcare expenses.
- The HSA may serve the dual purpose of providing for both medical and retirement expenses.
You, your employer, or both may contribute to your HSA. However, the total contributions are limited annually. The 2018 maximum contribution is $3450 for individuals, $6900 for families, or the amount of the health plan deductible, whichever is less. (HSA holders 55 and older may contribute an additional $1000 per year as a catch-up contribution, which means $4450 for an individual and $7900 for a family.)
- Distributions can be used for qualified medical expenses such as medical services, hospital costs, prescription drugs, dental and vision care, long-term care insurance and health insurance premiums during any period of unemployment.
- Spouses or dependents can also use the money for qualified, un-reimbursed medical expenses.
- Unspent balances accumulate year after year.
- Security - Protect against high or unexpected medical bills.
- Affordability - Switching to health insurance with a higher deductible lowers health insurance premiums.
- Flexibility - Use funds from the account to pay for current medical expenses, including those not covered by insurance, and future needs.
- Savings - Grow your account through investment earnings.
- Control - You decide about how much to put into the account, which institution will hold the account, and which investments to make.
- Portability - Keep your HSA even through changes in employment, medical coverage, marital status, and state residency.
- Ownership - Funds remain in the account from year to year, just like an IRA. There are no “use-it-or-lose-it” rules.
- Tax Savings - Contributions are tax-deductible, and earnings and withdrawals for qualified medical expenses are tax-free.
If distributions from an HSA are used for non-medical expenses, the amounts will be taxed and subject to an additional 20% tax penalty. Those not subject to the 20% penalty include: people age 65 and older, disabled persons, and those who inherit an HSA upon the death of the account holder.