Health Savings Account (HSA)
A Health Savings Account (HSA) is a savings account created to pay or reimburse medical expenses incurred. To qualify for an HSA contribution, you must be covered under a high deductible health plan (HDHP). You must not be enrolled in Medicare and have no other health coverage, and cannot be claimed as a dependent to be eligible for a HSA account. Alternatively, if the requirements are met, an HSA can be used for tax saving purposes. If you are eligible to open an HSA account, contributions can be funded by yourself as well as your employer. A key aspect to this account is that unused funds can be in fact carried over to the next year.
Contributions to the savings account can be made up by you as well as your employer. You and/or your employer are eligible to contribute up to $3,650 annually for individual taxpayers or up to $7,300 for family accounts for 2022. For 2023, the contribution limits rise to $3,850 for individuals and $7,750 for family accounts (under the age of 55). For those who are 55 years or older, they qualify for a catch-up contribution of up to $1,000. However, it is important to note, if a contribution exceeds your maximum amount allowed, a 6% penalty will be assessed.
Advantages & Disadvantages
An advantage of an HSA account is that direct contributions made from an individual are 100% tax-deductible from their income. You can take a deduction regardless of whether you itemize on your tax return. Interest earned from the account is not taxable as well. Additionally, as mentioned above, the account can be rolled over from year to year and is portable if you change employers.
There are a few disadvantages to an HSA account to keep in mind. In order to qualify for this plan, you must have a high deductible insurance plan. The deductible is the amount of money you will need to pay out-of-pocket each year before your insurance plan begins. Furthermore, you need to keep good records of the distributions for filing purposes. Qualified medical expenses cannot be deducted on Schedule A as an itemized deduction if they were equal to the tax-free distribution. There also may be fees associated with the account on a monthly or per transaction basis.
Distributions from a Health Savings Account
Withdrawals from an HSA account are not taxed if the funds are used for qualified purposes. The IRS considers the following expenses to be qualified:
- Dental Services
- Vision Care
- Prescription Drugs
- Psychiatric Treatments
- Over the counter medicine
- As well as some other expenses not covered by health insurance.
Unfortunately, insurance premiums are not considered a qualified medical expense unless the covered individual is over the age of 65, they are covered by Medicare or COBRA, or the covered period was while the individual was receiving unemployment compensation benefits.
If you choose to withdraw money from your HSA account for a reason not mentioned above, it is important to note your withdrawal is subject to income tax and a 20% tax penalty. Distributions will be reported on Form 1099-SA and should be provided to your accountant with your tax documents.
As you can see, there are many benefits associated with a Health Savings Account. They are a great way to put money aside for those inevitable medical emergencies. Just like a 401(k) or other retirement plan, funds can be deposited into an HSA directly from your paycheck. This gives taxpayers peace of mind that they have money set aside to cover most or all of their medical expenses, with little to no maintenance. To go along with that, contributions to an HSA are 100% tax deductible. We strongly encourage you to check with your employer to see if they offer some sort of HSA plan, as it is one of the most tax advantageous accounts out there. If they do not offer a plan, or if you are self-employed or unemployed, it would be beneficial to you to consider setting up an HSA on your own. If you have questions or would like to learn more about Health Savings Accounts, feel free to contact our office at (732) 739-8800. As always, our goal is to make your life less taxing!