What is a Health Savings Account?

Even with insurance coverage, many individuals and families have a difficult time covering the costs associated with health care. Certain elective procedures may not be covered or deductibles may be particularly high, depending on the insurer or the plan, or someone may be experiencing serious health problems. Fortunately, there are some options to help you lower your health care expenses.

One of these options is the use of a health savings account (HSA), not to be confused with a flexible spending account (or FSA). Basically, HSAs are accounts that may be used only for health care expenses. The main advantage is the ability to contribute pre-tax earnings into the account, up to a certain limit, similar to an FSA.

The following information will help you better understand how to qualify for HSAs, how they work, and their financial benefits.

How to Qualify for a Health Savings Account

In order to qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP) as defined by the Internal Revenue Service (IRS). Amounts are subject to change annually; but for tax year 2018, a HDHP is defined as follows:

  • Deductible of at least $1,350 for an individual or $2,700 for a family; and
  • Total annual out-of-pocket expenses (deductibles, copayments, etc.) of up to $6,650 for an individual or $13,300 for a family.

In addition, to qualify for an HSA you must have no other health care coverage (with some exceptions, such as supplemental insurance for a specific illness or condition, dental care, or vision care); you must not be enrolled in Medicare; and you must not be claimed on another person's tax return.

How Health Savings Accounts Work

Some insurance companies and employers offer HSAs, but most financial institutions (banks, credit unions) also offer them. You decide how much to contribute to your HSA each year, but must stay within the annual contribution limit ($3,450 for individuals and $6,900 for families for tax year 2018). Unlike FSAs, funds contributed to an HSA roll over each year and don't affect your annual limits.

Typically, you'll be provided with a debit card or checkbook linked to your HSA balance.

Under the "last-month" rule, those eligible on the first day of the last month of the tax year (usually Dec. 1) are considered eligible for the entire year. This means you may contribute the entire amount allowed for that year -- however, you also must remain eligible for the "testing period," which is the last day of the 12th month following that period (usually Dec. 31 of the next year). Failure to remain eligible can subject you to a 10 percent tax penalty.

If you're eligible for an HSA and 55 or older at the end of your tax year, you may contribute an additional $1,000 to your HSA.

If you have an HSA, you'll need to file Form 8889 with the IRS for the applicable tax year.

Qualified Medical Expenses for HSAs

HSAs don't cover medical expenses incurred before the account is set up. This also applies to the last-month rule explained above; for example, you can't pay for expenses incurred prior to Dec. 1 (assuming that's the first date of eligibility) even though you may contribute the entire annual amount.

Generally, qualified medical expenses for HSA purposes include those incurred by:

  • You and your spouse;
  • Dependents claimed on your tax returns; and
  • Anyone you could have claimed as a dependent on your tax return, but who
    • Filed a joint tax return,
    • Had a gross income of more than $4,050, or
    • Could be claimed as a dependent on someone else's tax return.

IRS Publication 502 provides more detailed guidance on what qualifies as a medical expense for an HSA.

Tax and Financial Benefits of Health Savings Accounts

Perhaps the biggest attraction of HSAs are their tax advantages. Specifically, pre-tax funds are contributed to the account, can grow without incurring taxes, and can be spent tax-free. And since money contributed to an HSA isn't taxable income, using an HSA could put you in a lower tax bracket and reduce your overall tax burden.

Additionally, you may invest your HSA in mutual funds, stocks, and other types of investments.

Confused About Health Savings Accounts? An Attorney Can Help

While the concept behind health savings accounts is rather straight-forward, the details of eligibility and contributions can get confusing. If you need help from an expert, consider speaking with an experienced health care attorney who also understands the tax code and how it applies to you.

Next Steps

Contact a qualified health care attorney to help navigate legal issues around your health care.

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