Health Savings Accounts help ease medical expense payments | Moneta | Fee Only Financial Planning in St. Louis & Denver | Investment Advisors | Clients Nationwide

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By Brighton Samet, Moneta Tax Planning Consultant

With open enrollment season approaching, it’s a good time to re-evaluate your health insurance costs and coverage. Over the past decade, high deductible health insurance plans (HDHP) have become increasingly common, likely because of their lower monthly insurance premiums. To ease the burden of those high deductibles, a health savings account (HSA) can often be paired with a HDHP to save for medical expenses with many tax advantages.

What is a health savings account and how does it work?

The health savings account was introduced in 2004 as a new savings vehicle designed to help individuals covered by high deductible health plans offset health care costs.  Both individuals and their employers can contribute to the tax-advantaged account, which immediately belong to the individual owner. The account can be used for short-term or long-term savings because unused funds are not lost at the end of the year and are not tied to a particular employer.

The HSA differs from another common medical benefit–a flexible spending arrangement (FSA)–because the FSA is owned by your employer and funds can be forfeited if not used by the plan year deadline.

How does an HSA affect my taxes?

At a high level, health savings accounts offer a triple tax advantage.

  1. The contributions are either a tax deduction or not included in income (and you do not need to itemize deductions).
  2. The yearly earnings in the account are tax-free.
  3. The distributions are tax-free if used to pay for qualified medical expenses.

 What expenses can you use an HSA for?

An HSA can be used for current health expenses or the money can be saved for future health expenses. These can be out-of-pocket health expenses for the account owner, his or her spouse and any qualified dependent.

You can pay or reimburse yourself for qualified medical expenses incurred after you established the HSA. You should keep records to show that you incurred qualified medical expenses, that those expenses had not been paid or reimbursed by another source and that those medical expenses had not been taken as an itemized deduction in any tax year. You can still receive tax-free distributions even if you are no longer eligible under a HDHP.

Do HSA funds carry over?

Unlike medical flexible spending arrangements/accounts (FSAs), there is no limit on carryovers or when the funds may be used. All money in an HSA belongs to the account owner and will not be forfeited if not used by the end of the year. The HSA is also portable – it stays with you if you change employers or leave the workforce.

 Retirement uses for your HSA

An HSA can also be used as a retirement savings vehicle for medical expenses. You can invest the funds and let them grow for years. If you use the funds for qualifying medical expenses, the funds used are not subject to federal taxes. This provides more income tax advantages than any retirement account. You do not have to choose between a tax deduction now and tax-free withdrawals later.

While there may be no required minimum distributions like other retirement accounts, you may want to consider using your HSA funds before you die. If your spouse is the designated beneficiary of the account, it will be treated as your spouse’s HSA after your death. However, if the designated beneficiary is not your spouse, then the account stops being an HSA and the fair market value of the HSA becomes taxable to the beneficiary in the year you die.

Who qualifies for an HSA?

Besides coverage under a high deductible health plan (the IRS sets yearly rules for what qualifies), there are also limitations on what other health insurance coverage you can have. You also cannot qualify if you are enrolled in Medicare or can be claimed as a dependent on someone else’s tax return. Please see IRS rules for a complete listing of eligibility requirements.

What are the HSA contribution limits for 2019 and 2020?

The 2019 contribution limits for an HSA are $3,500 for an individual and $7,000 for family coverage. The 2020 contribution limits for an HSA increase to $3,550 for an individual and $7,100 for family coverage. Those age 55 or older may also make additional “catch-up” contributions of up to $1,000 per year. Please see IRS rules for other requirements before contributing.

How do I Contribute to an HSA?

You can make direct contributions to your HSA for the current year until April 15 of the following year. These direct contributions can then be a deduction when arriving at adjusted gross income.

If your employer offers a HDHP, they may be willing to contribute to your account on your behalf. These employer contributions are not included in your taxable wages on your W-2 and are therefore not taxed on your Form 1040. If included in your employer’s cafeteria plan, which allow you to receive certain benefits on a pre-tax basis, you, as the employee, can also choose to fund the account through payroll deductions that will also be excluded from your gross income. Both the employer contribution and any amount an employee elects to contribute through a cafeteria plan are not subject to employment taxes either, so there are also social security and Medicare tax savings to these contributions.

The contribution limits above are for contributions from all sources, whether made directly by you, by your employer, by payroll deduction or from any other third party.

Final Thoughts

There are many items to consider when choosing a health insurance plan. The ability to contribute to a health savings account is only one piece to examine. While the rules can be complex, there are many benefits to taking advantage of savings accounts available to you.

As always, we recommend consulting with an appropriately credentialed professional before making any financial or tax-planning related decision.

© 2019 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.