Why You Should Consider a Health Savings Account

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With open enrollment for employer benefits coming up, now is the perfect time to consider opening a Health Savings Account (HSA). An HSA is a great opportunity for eligible individuals to lower their out-of-pocket health care expenses and federal tax bill. But before you sign-up, there are a few things you should know about this option.

Am I eligible to open an HSA?

There are a few requirements for obtaining the benefits of an HSA:

  • HSAs are available to individuals who carry health insurance with a deductible of at least $1,300 for single coverage or $2,600 for family coverage. And it’s okay if the insurance plan doesn’t impose any deductible for preventive care, such as annual checkups.
  • HSAs are not available to individuals who receive Medicare benefits or are claimed as a dependent on another person’s tax return.

Where can I open an HSA?

An HSA can generally be set up at a bank, an insurance company, or other institution the IRS deems suitable as long as it’s established exclusively for the purpose of paying the account beneficiary’s qualified medical expenses

How much can I contribute to an HSA?

Eligible individuals under age 55 can make tax-deductible HSA contributions in 2015 of up to $3,350 for single coverage or $6,650 for family coverage. Individuals age 55 or older by the end of the tax year for which the HSA contribution is made can contribute up to $1,000 more. The contribution for a particular tax year can be made as late as April 15 of the following year.

Are my employer’s contributions to my HSA also tax exempt?

Employer contributions to an employee’s HSA are exempt from federal income, Social Security, Medicare, and unemployment taxes.

What can I pay for with my HSA?

HSA funds can be used to cover qualified medical expenses for the account beneficiary, their spouse, and dependents not covered by health or dental insurance such as co pays for doctor’s visits, prescriptions, and laboratory fees. However, health insurance premiums don’t qualify. (Click here for more examples).

Can I withdraw my HSA funds for non-qualified expenses?

HSA distributions that are not used for qualified medical expenses are included in your gross income and subjected to an additional 20% penalty tax.

What happens to my HSA funds if I don’t use them all in a year?

If you make contributions to your HSA account and do not need to spend the entire amount contributed during the year on your qualified medical expenses, the balance in the HSA at year end can be carried over to the next year and beyond. In addition, there are no income phase-out rules, so HSAs are available to high-earners and low-earners alike.

How can I deduct my HSA contributions on my taxes?

The deduction for your contributions to an HSA can be claimed on Page 1 of your tax return after completing IRS Form 8889, Health Savings Accounts (HSAs). The deduction is claimed in arriving at adjusted gross income; thus, eligible individuals can claim the benefit whether they itemize or not. Unfortunately, however, the deduction doesn’t reduce a self-employed person’s self-employment tax bill.

SKR+CO Expert
Bernie Benyak, CPA, CFP®, NSSA® Tax Director
Bernie has been in public accounting since 1995. His specialties include working with small business owners, relatively high net worth individuals, and real estate companies.