When you talk about tax-favored accounts to help you save, retirement accounts are the most obvious thing that comes to mind. Yet as lawmakers in Washington consider healthcare reform, health savings accounts have come back into the spotlight. HSAs let people save for future medical expenses in a way that can reduce the amount they have to pay in taxes. Currently, not everyone gets to create an HSA, but that could change if some proponents of the accounts get proposed changes into law.
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What is an HSA, and why is it a good thing for me?
Health savings accounts are accounts designed to hold money to cover medical expenses. HSA contributions are tax-deductible, investment earnings within HSA are tax-deferred, and as long as you use the money for qualified medical expenses, withdrawals end up being tax-free. If you're fortunate enough to have an employer who makes contributions on your behalf to your health savings accounts, those employer contributions are excluded from your income. Unlike the flexible spending accounts that many Americans have at work, HSA money can be carried over from year to year without risk of losing any of it, letting you take advantage of longer periods of tax-free growth in your investments within the account.
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How can I get an HSA?
Currently, the reason why relatively few people take advantage of health savings accounts is that there are strict requirements to qualify. Eligible HSA users need to have insurance coverage under a high deductible health plan. In 2017, that means an insurance policy that has a minimum deductible of $1,300 for self-only health insurance policies, or $2,600 for family policies. HDHPs also have to have maximum out-of-pocket amounts of $6,550 for self-only coverage or $13,100 for family coverage.
In addition, if you're also covered under someone else's health insurance plan, then you can't contribute to an HSA even if your own policy is an HDHP. The exceptions are that you can be covered for certain ancillary services, such as dental or vision services, without running afoul of the regulations.
How much can I contribute to an HSA?
As we saw above, the type of policy you have makes a difference in many aspects, including the maximum amount you can contribute to a health savings account. For self-only policies, the 2017 limit on contributions is $3,400. The corresponding limit for family coverage is $6,750 in 2017.
In addition, a catch-up contribution applies for those who are 55 or older. Eligible HSA participants can contribute an extra $1,000 toward their HSAs.
Can Medicare participants use an HSA?
Those who are enrolled in Medicare can no longer make contributions to an HSA. For the year in which you sign up for Medicare, you can make a prorated contribution for the year. As an example, if you turned 65 three months into the year, then you could contribute one-fourth of the contribution limit to the HSA for that given year, because you weren't enrolled in Medicare during those first three months.
How long do I have to contribute to an HSA?
Money has to be within the health savings account by the deadline for filing the tax return for the year in question. So if you're looking to make a 2016 tax year contribution, you have to do so by April 18. Employers also have the same amount of time to make prior-year contributions.
What counts as allowable medical expenses?
A wide variety of medical expenses qualifies for tax-free treatment under HSAs. Inpatient and outpatient medical services, prescription drugs, and other expenses that qualify for the medical expense deduction are typically allowable. In addition, expenses for family members such as your spouse and anyone you can claim as a dependent on your tax return are also allowable.
Who gets unused HSA funds after I die?
Like IRAs, health savings accounts have beneficiary designations. Whoever you pick will inherit your HSA. Surviving spouses can treat inherited HSAs as their own. Others have to take the full value of the health savings account and include it on their tax return as taxable income in the year of death.
What's changing for HSAs?
The Trump administration has proposed a role for HSAs in healthcare reform. Policymakers believe that changes to how HSAs work would be needed in order to make them more universally available, including reduced minimum deductibles and expanding use of HSA funds to allow for spending on health insurance premiums. The big question is whether the added tax cost of offering incentives would be offset by cost savings from greater HSA use, and lawmakers seem divided about how that would pan out for the general public.
Health savings accounts aren't well-known, but they can give you a big tax break. If HSA use expands in the future, you'll want to look closely to see if you can use them to your advantage.
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