What is a Health Savings Account (HSA)?
HSAs provide triple-tax advantages: contributions, earnings, and qualified distributions all are exempt from federal income tax, FICA (Social Security and Medicare) tax and state income taxes (for most states).
Unused HSA dollars roll over from year to year, making HSAs a convenient and easy way to save and invest for future medical expenses. You own your HSA at all times and can take it with you when you change medical plans, change jobs or retire.
- Are covered by a qualified high-deductible health plan (HDHP) on the first day of a given month;
- Are not covered by another health care plan, such as a health plan sponsored by your spouse’s employer;
- Are not enrolled in Medicare or TriCare;
- Have not received VA benefits at any time during the preceding three months. However, if you are a veteran with a service-connected disability, this exclusion does not apply;
- Are not claimed as a dependent on another individual's tax return;
IRS Guidelines for a qualified HDHP for 2019:
- The minimum HDHP deductible by law is $1,350 for individuals and $2,700 for families.
- The maximum out-of-pocket expenses by law (including deductible and co-payments, but not including premiums) cannot exceed $6,750 for individuals and $13,500 for families.
- The deductible and maximum out-of-pocket expenses are indexed annually for inflation by the IRS and US Department of Treasury.
Payroll deductions: If your employer offers the option, you may specify a regular contribution to be deducted from your paycheck. This contribution will be made before Social Security, federal, and most state income taxes are deducted.
After-tax contributions: You may choose to make all or part of your annual account contributions to your HSA by making “after-tax” contributions to your account. These contributions may be deducted on your income tax return, using IRS Form 1040 and Form 8889.
Employers may make contributions to your account as well; while you do not take a deduction for these contributions, they are excluded from your gross income.
You are eligible to make contributions to your HSA as long as you meet the definition of an “eligible individual” as listed in the question, “Who is eligible to open an HSA?”
For 2019, the combined maximum contributions to your HSA, including any made by your employer to your account, are $3,500 if you have individual coverage and $7,000 if you have family coverage. If you turn age 55 or older in 2019, you may add up to $1,000 more as a “catch up” contribution.
These amounts are valid as long as you enroll in qualified HDHP coverage before the first day of December, meaning you have held at least one full month of HDHP coverage, and so long as you continue to maintain qualified HDHP coverage for the next 12 months. Otherwise, you may be eligible to contribute a prorated amount to your HSA account.
The IRS determines these maximum contribution limits annually.
Contributions- Payroll deposits are made with pretax dollars, meaning they are not subject to federal (or state, for most states) income taxes. Deposits made with after-tax dollars can be deducted from your gross income, meaning you pay less income tax at the end of year. Employers may make contributions to your account; these contributions are excluded from your gross income.
Earnings- The interest you earn on your HSA grows tax free.
Distributions- Withdrawals from your HSA used to pay for qualified medical expenses are not subject to pay federal (or state, for most states) income taxes.
Flexible: There are no "use it or lose it" rules. Even if you are no longer eligible to make contributions, funds in your account may still be used to pay for qualified medical expenses tax-free. And after age 65, or in cases of disability, the funds in the account can be used for nonqualified expenses.
Portable: The money is yours; accounts move with you when you change medical plans, change employers or retire.
Invest: Unused funds can grow through interest and/or be invested. Any earnings and can be "banked" for future medical expenses.
If both you and your spouse have family coverage under qualified high-deductible health plans, the maximum total tax-deductible HSA contribution both of you can make (including employer contributions) is the IRS limit for family coverage. This contribution can be divided between you and your spouse however you wish. If you and/or your spouse are eligible to make catch-up contributions, you may each contribute your eligible catch-up contribution to your individual HSA.
Spouse designated beneficiary. If your spouse is your designated beneficiary, the account will be treated as your spouse's HSA after your death. The account will continue to be tax-free for qualified medical distributions. If your spouse is covered by a qualified HDHP, contributions to the account may also be made tax-free, up to maximum annual contribution limits.
Other than Spouse designated beneficiary. If you designate someone other than your spouse as the beneficiary of your HSA:
- The account stops being an HSA on the date of your death;
- The fair market value of the HSA becomes taxable to the beneficiary in the year in which you die (without penalties); and
- The amount taxable to a beneficiary (other than your estate) is reduced by any qualified medical expenses you incurred prior to your death that are paid from the HSA by the beneficiary within one year after the date of death.
Your estate is the beneficiary. If your estate is the beneficiary of your HSA, the value of your account is included on your final income tax return.
NO designated beneficiary on file. If you do not have a beneficiary on file, the funds are payable to the accountholders estate.
If I close my HSA, are there any tax penalties?
There are no tax penalties for closing an HSA. However, if you use HSA funds for other than qualified medical expenses, those distributions will be subject to ordinary income tax, and in some cases, a 20% penalty.
Also, after making such a transfer, you must continue to participate in a qualifying high-deductible health plan for 13 consecutive months, beginning in the month of the IRA-to-HSA transfer. If you do not, you will be subject to income taxes and a 20% penalty tax on the transferred amount, except in the case of death or disability. Such a transfer may be an option if you incur significant medical expenses and find yourself unable to afford to make the maximum HSA contribution.