The Health Savings Account: an often-overlooked financial opportunity
A Health Savings Account (HSA) is a unique type of savings and investment vehicle that encourages United States residents to set aside money for healthcare-related expenses, and the federal government gives significant tax-related incentives for doing so. It is only available to those with a High Deductible Health Plan (HDHP), who are not enrolled in Medicare and have not yet filed for Social Security. (Medicare enrollees may draw on their funds in existing HSAs, but may not contribute more.)
At the Federal level, contributions to HSAs are tax-deductible, and you do not have to pay federal taxes on the money you withdraw, provided you spend it on qualified medical expenses. Spending it on non-qualified expenses before age 65 will typically incur a 20% penalty; but after age 65, distributions for non-medical expenses are no longer penalized — you must simply pay income taxes on the funds, as if it were a Traditional IRA.
Common qualified medical expenses include, but are not limited to:
- Capital expenses for making your home accessible for your or a dependent’s disabilities
- Dental & vision expenses, including eyecare exams and glasses or contacts
- Out-of-pocket co-pays for doctors’ visits and prescription drugs
- Medicare parts A, B, D, and Medicare HMO premiums
- Long-term care costs & LTC insurance premiums
Common non-qualified medical expenses include, but are not limited to:
- Cosmetic surgery
- Funeral expenses
- Health club dues
- Medigap plans
- Non-prescription drugs and medicines, except for insulin
- Weight-loss program fees, unless prescribed for a specific illness
Participants should (and often are required to) keep a certain level of cash in their HSA, but most HSA custodians also provide the option to invest some of the balance in the market. When you invest, any growth of the asset is also tax-free at the federal level.
If you are a Bell client with an HSA and would like information on HSA investment options, please contact your Relationship Manager.
An HSA is a “portable” account — it remains with you and part of your assets even if you have the account through an employer-sponsored health plan and change employers. You also retain access to the account and its funds even if you switch from a High-Deductible Health Plan to a traditional health insurance plan, though you cannot make new contributions in that case.
HSAs should not be confused with healthcare Flexible Spending Accounts (FSAs), also known as Flexible Spending Arrangements. Though both HSAs and FSAs allow you to preemptively set aside pre-tax funds for approved medical expenses, FSA funds cannot be invested, and only a maximum of $500 can be “carried over” from year-to-year; the rest of any FSA’s balance is forfeited (i.e., “Use it or lose It” every calendar year.) Also, the IRS has capped annual contributions to medical FSAs at $2,650/year for 2018.
The most straightforward way to contribute to an HSA is through payroll deductions during the calendar year. However, you can also contribute on your own and deduct them when you file your federal taxes. It’s also not too late to make contributions for tax year 2017 — you have until 2017’s tax-filing deadline (Tuesday, April 17, 2018) to max out your 2017 contributions.
Though January is an excellent time to begin making contributions to an HSA, payroll deductions can be started, adjusted, or stopped at any time during a calendar year — even multiple times during the same year. For 2018, limits have been capped at $3,450 per year for individuals, and $6,900 for families. However, those over age 55 can also make an additional $1,000 per year “catch-up contribution”.
Most state tax laws regarding HSAs follow the federal HSA-related tax laws, making contributions tax-deductible, and growth and qualified medical distributions tax-free. However, in the states of California, Alabama, and New Jersey, contributions to an HSA are not deductible on state taxes, earnings are taxable, and contributions made by an employer must be added to the employee’s Adjusted Gross Income on their state tax return.
When considering the tax-related opportunities and restrictions of any financial decisions, please consult with your tax professional.