Health Savings Account (HSA) Frequently Asked Questions
Q. What are the Federal Tax benefits of my HSA contribution?
A. 100% of your contribution is deductible. Furthermore, the earnings grow tax deferred and all qualified distributions are tax free. Be sure to consult with your tax or legal professional for guidance.
Q. How do I claim the Federal Tax Deduction for my HSA contribution?
A. Any contributions made by you and any other person on your behalf are deductible as long as they do not exceed the maximum annual contribution amount. Employer contributions are not deductible. However, any employer contributions do not count as wages for federal income tax purposes.
Q. When is the contribution deadline for funding an HSA?
A. Contributions for the taxable year can be made in one or more payments, at the convenience of the individual or the employer, at any time prior to the time prescribed by law (without extensions) for filing the eligible individual’s federal income tax return for that year, but not before the beginning of that year. For calendar year taxpayers, the deadline for contributions to an HSA is generally April 15 following the year for which the contributions are made. Although the annual contribution is determined monthly, the maximum contribution may be made on the first day of the year.
Q. How are HSA distributions taxed?
A. Qualified distributions from your HSA are excludable from gross income. Any other distributions are included in your gross income and are subject to an additional 20% tax on the amount included, except in the following cases:
- Your death
- Your disability
- You reach the age of 65 Any HSA distributions that are not rolled over will be taxed as income in the year they are distributed, unless used for qualified medical expenses. HSA custodians/ trustees are not required to determine whether HSA distributions are qualified. The qualified medical expenses must be incurred only after the HSA has been established and funded.
Q. What happens to my HSA in the event of my death?
A. If you are married and your spouse is your beneficiary, the HSA becomes his/her HSA. If your beneficiary is not your spouse, the HSA ceases to be an HSA effective on the date of your death. The proceeds will be included in the beneficiary’s gross income for the year of death.
Q. How do I know whether my expenses are qualified or not?
A. It is your responsibility to be sure that you are paying qualified health care expenses from your Health Savings Account. The best way for you to be sure if your expenses are qualified is to refer to Section 213 of the IRS Code, under Publication 502: Medical and Dental Expenses. To order IRS Publication 502, go to the IRS website www.irs.gov. You may also wish to consult with your tax advisor regarding these matters.
Q. What is a Health Savings
A. A Health Savings Account, or HSA, is a savings account which can be used to pay medical expenses not covered by insurance. Contributions made by individuals and family members are tax-deductible (for the account beneficiary) even if the account beneficiary does not itemize. Employer contributions are made on a pre-tax basis and are not taxable to the employee. Employers will be allowed to offer HSAs through a cafeteria plan.
Q. Do I still need medical
A. Yes. Under the legislation passed by Congress, the HSA must be coupled with a high-deductible medical insurance plan. Individuals pay small medical bills out of their own pocket (or out of their HSA account) up to the deductible but have medical coverage in case of serious illness or accident.
Q. For the purpose of HSAs,
what is a high deductible plan?
A. A minimum deductible $1,200 for an individual and a $2,400 deductible for a family. Total out of pocket maximum of $6,050 for an individual and a maximum of $12,100 out-of-pocket for families.
Things that cause a common health insurance plan not to qualify as HSA eligible:
- A plan that has an individual deductible lower than $1,200
- A plan that has an individual out of pocket maximum is greater than $6,050 and a family out of pocket maximum that is greater than $12,100
- A plan that has a separate prescription benefit (ie - 50% not subject to deductible)
- A plan that has a doctor visit copay for "non-preventative" services.
What is the maximum HSA deposit amount?
A. If you have an individual policy covering only yourself, you can contribute up to 100% of the deductible per calendar year or $3,100 whichever is less. For a family covered by an individual plan, up to 100% of the family deductible per calendar year or $6,250 whichever is less, can be contributed. Additional contributions for individuals 55 years and older (before the close of the taxable year) can be made. A married couple can make two catch- up contributions as long as both spouses are at least 55. The annual cach-up contribution is $1,000 per eligible person. Catch-up contributions will help individuals accumulate assets for retiree health expenses.
Q. What happens to the money
in the HSA Account?
A. The money can be carried over for medical expenses the following year, and you can continue contributing up to the maximum deposit each year. HSA funds can be used to pay post-retirement healthcare expenses not covered by employers or by Medicare, or to purchase long-term care insurance and possibly Medicare Advantage (formerly known as Medicare + Choice plan) premiums.
Q. Can I withdraw funds
from the HSA for non-medical expenses?
A. Distributions made for any other purpose are subject to income tax and a 10% penalty. The 10% penalty is waived in the case of death or disability. The 10% penalty is also waived for distributions made by individuals age 65 and older.
Q. How much money will this
save me on taxes? Is an HSA preferable to just deducting medical expenses
on my income tax?
A. Most individuals save on taxes using HSAs because of the IRS limits on deducting medical expenses. How much will depend on your income bracket, any state taxes in your area, whether your state allows a deduction for HSA funds.
Q. When can I start depositing
money into an HSA account?
A. Immediately after you start a qualified Major Medical Plan.
Q. Can I make a lump sum
Deposit at the beginning of the year?
A. You may make an annual lump sum Deposit, or if you wish you can set up Deposits on a monthly basis.
Q. Are there administration
A. This can vary from company to company. HSAs are available with no administration fee.
Q. Does the account pay
A. Some companies also offer accounts that pay interest. This interest is normally tax deferred. Some companies allow you to invest your HSA funds in Mutual Funds.
Q. How will my HSA account
A. Some companies give you a debit card to pay your claims with, others may combine the processing with insurance claims processing. Some may require you to fill out claims forms. Check the companies you are thinking of buying from to see how they pay claims.