Health Savings Accounts

Healthcare is one of the largest expenses an individual or family will have over their lifetime. Besides insurance premiums, other costs such as deductibles, co-payments, co-insurance, prescriptions, dental, eyecare, and long-term care can add up.

Most healthcare costs are deductible on Schedule A (Itemized Deductions) of the Federal 1040 tax return. Unfortunately, most Americans do not claim Itemized Deductions and cannot benefit from this provision. Even if they did file Schedule A, the deductible portion of medical expenses is limited to the portion that exceeds 7.5% of Adjusted Gross Income (AGI). For many, this hurdle is too high to allow any deduction and thus, no tax benefit. If only there was a better way!

The good news is there might be a better way. A way in which you could get a tax benefit, avoid the 7.5% of AGI hurdle, and build a reserve that could be used in future years. The better way is a Health Savings Account.

A. An HSA is a tax-advantaged savings account that allows money to be set aside on a pre-tax basis to pay qualified medical expenses. By using untaxed savings to pay medical expenses such as deductibles, copayments, coinsurance, and prescriptions, an HSA reduces overall health care costs by providing tax savings.

A. Many employers offer Health Savings Accounts to their employees and allow the employee to make pre-tax contributions to the HSA. Some employers even make tax-free contributions to the HSA on behalf of the employee. If your employer does not offer an HSA and you are covered by a High Deductible Health Plan (HDHP), you can open and fund an individual or family HSA with certain financial firms.

A. There are restrictions on funding an HSA. An individual can fund a Health Savings Account for a year in which he or she is covered by an HSA-compatible health insurance plan. There are also dollar limitations on the total amount which can be contributed each year. The maximum contribution amounts are listed below:

Year Individual Family
2023 $3,850 $7,750
2022 $3,650 $7,300
2021 $3,600 $7,200

If you are an eligible individual who is age 55 or older at the end of the tax year, your contribution limit is increased by $1,000. If married and each spouse is 55+ and covered by a HDHP, each may contribute an additional $1,000 to their respective HSA account.

The maximum amount includes amounts contributed by the individual and employer. For instance, if the employer contributes $500 toward an Individual HSA, the individual is limited to $3,150 in 2022.

You generally have until the tax filing deadline to contribute to an HSA. For tax year 2022, you can make contributions until April 18, 2023.

A. A HDHP is a health insurance plan that only covers preventive services before the deductible. In addition, the minimum deductible and maximum out-of-pocket (OOP) expenses must fall within a specific range as presented below:

Individual Family
Year Min. Deductible Max OOP Min. Deductible Max OOP
2023 $1,500 $7,500 $3,000 $15,000
2022 $1,400 $7,050 $2,800 $14,100
2021 $1,400 $7,000 $2,800 $14,000

If the health plan deductible is less than the amount listed above or the maximum out-of-pocket expenses is greater than the amount listed above, the health plan is not an HSA-compatible plan and no contribution may be made to an HSA. Some health plans on the federal Marketplace or available directly through insurance companies are not HSA-compatible due to the maximum OOP being too high.

A. Unfortunately, you cannot contribute to a Health Savings Account if you are covered by Medicare.

A. Yes. You can pay medical expenses from a Health Savings Account when you don’t have insurance. The only requirement is that contributions to the HSA were made when you were covered by an HSA-compatible plan.

A. Yes. You can pay medical expenses from a Health Savings Account when you are covered by Medicare. The only requirement is that contributions to the HSA were made when you were covered by an HSA-compatible plan.

A. Yes. You can pay medical expenses from a Health Savings Account when you are covered by a health plan which is not HSA-compatible. The only requirement is that contributions to the HSA were made when you were covered by an HSA-compatible plan.

A. No. You do not lose the HSA contribution if unused at year end. In fact, you can use an HSA as a long-term savings account.

A. No. Distributions from an HSA are tax-free if used to pay medical expenses.

A.Yes. Distributions from an HSA are taxable unless used to pay medical expenses.

A.Yes. There is an additional 20% tax charged on any distribution not used for medical expenses. The tax is in addition to any income taxes that may be due.

A.In the event you have funds in an HSA when you die, the funds will be handled based upon who is listed as the designated beneficiary.

If your spouse is the designated beneficiary, the HSA will be treated as the spouse’s HSA after your death. If your spouse isn’t the designed beneficiary, the account is no longer considered an HSA and the balance becomes taxable to the beneficiary in the year in which you die. If your estate is the beneficiary, the value is included on your final income tax return.

A.In general, an HSA can be used as a long-term, tax-free investment account. The type of investments in an HSA will be limited to those allowed by the custodian holding the funds.

A.The term, “triple benefit” is derived from three tax advantages of an HSA. First, contributions are tax-deductible when made. Second, the account grows tax-free from year-to-year. Third, distributions are tax-free if used to pay or reimburse medical expenses.

A.Maybe. The determining factors are: 1) when you paid the medical expenses and 2) when you established the HSA. You can receive a tax-free distribution from the HSA, at any time, to reimburse medical expenses if the expenses were paid after establishing the HSA. You cannot reimburse yourself for medical expenses paid prior to establishing the HSA.

As an example, let’s assume you established an HSA in 2015 and the account has a current balance of $35,000. Let’s also assume that you incurred medical expenses of $20,000 since 2015 but did not use the HSA to pay those expenses. You could take a tax-free distribution of $20,000 from the HSA account in the current year. Like any reimbursement of medical expenses, you should have records to support the tax-free distribution.

Complete our contact us form or call us at (678) 919-1250 if you would like to discuss Health Savings Accounts, healthcare or other tax saving opportunities.