Health Savings Accounts
A health savings account (HSA) is a custodial account established for the exclusive purpose of paying for qualified medical expenses of the account beneficiary. HSAs can be established by employees or through an employer’s cafeteria plan
To be eligible to establish an HSA in any month, an individual:
- must be covered by a high-deductible health plan (HDHP) on the first day of the month,
- must not be covered by any other plan that is not a HDHP,
- must not be enrolled in Medicare, and
- cannot be claimed as a dependent on another person’s tax return.
Permitted coverage includes coverage for accidents, disability, dental care, vision care, long term care or prescription drugs. Also allowed is permitted insurance for a specified disease or illness, insurance paying a fixed amount per day (or other period) for hospitalization, and insurance if substantially all the coverage relates to liabilities for workers’ compensation, ownership or use of property (for example, auto insurance), or torts.
A taxpayer who is an eligible individual for an HSA on the first day of the last month of a tax year is treated as eligible during every month of that tax year. If the taxpayer ceases to be eligible during the period beginning with the last month of the tax year and ending on the last day of the 12th month following that month, he or she must include in gross income an amount equal to the amount actually contributed minus the sum of the monthly contribution limits to which the individual would otherwise have been entitled. An additional 10-percent tax is imposed on this amount. Recapture does not apply if the taxpayer is ineligible due to death or disability.
Contributions made to an HSA by an eligible individual outside the employment context are deductible by the individual in determining adjusted gross income. The maximum amount an individual can deduct for 2015 is $3,350 for self-only coverage or $6,650 for family coverage. The maximum an individual can deduct for 2014 is $3,300 for self-only coverage or $6,550 for family coverage. The maximum amount an individual can deduct for 2013 is $3,250 for self-only coverage or $6,450 for family coverage. Excess contributions are includible in gross income and subject to a six-percent excise tax. Individuals who reach age 55 by the end of the tax year can increase their annual contributions by $1,000. Contributions cannot be made after the participant attains age 65 or the participant is enrolled in Medicare, but in either circumstance withdrawals for qualified medical expenses continue to be excluded from gross income.
For married taxpayers, if either spouse has family coverage under any health plan, then both will be treated as having only family coverage under the plan. If each spouse has family coverage under different plans, then both spouses are treated as having coverage under the plan with the lowest deductible. If only one spouse is an eligible individual, only that spouse may contribute to an HSA. If one or both spouses have family coverage, the contribution limit is the lowest deductible amount, divided equally between the spouses unless they agree on a different division, and further reduced by any contribution to an Archer MSA. Both spouses may make the catch-up contributions for individuals age 55 or over without exceeding the family coverage limit.
If a husband and wife are each eligible to make catch-up contributions, each spouse can make such contributions only to his or her own HSA. The maximum annual contribution limit for a married couple is the statutory maximum for family coverage where: (1) one spouse has family coverage and the other spouse has self-only coverage, regardless of whether the family coverage includes the spouse with self-only coverage; or (2) both spouses have family coverage, regardless of whether each spouse’s family coverage covers the other spouse. A married taxpayer covered under an HDHP can contribute to an HSA for use with qualifying out-of-pocket medical expenses even if his or her spouse’s coverage is non-qualifying family coverage, as long as the taxpayer is not covered by the spouse’s policy.
An HDHP is a plan with (1) an annual deductible of at least $1,300 for 2015 ($1,250 for 2013 and 2014) for self-only coverage or $2,600 for 2015 ($2,500 for 2013 and 2014) for family coverage; and (2) an annual out-of-pocket expenses limit of $6,450 for 2015 ($6,350 for 2014 and $6,250 for 2013) for self-only coverage or $12,900 for 2015 ($12,700 for 2014 and $12,500 for 2013) for family coverage. Out-of-pocket expenses include deductibles, co-payments and other amounts (other than premiums) that must be paid for plan benefits.
Distributions from an HSA are excluded from the account beneficiary’s gross income only if used to pay or be reimbursed for qualified medical expenses incurred during the coverage period. Qualified medical expenses are those specified in the plan that would generally qualify as an itemized deduction and incurred by the account beneficiary, his or her spouse, or dependents. Nonprescription medicines (other than insulin) are not considered qualified medical expenses under an HSA. In addition, health insurance premiums are not qualified medical expenses under an HSA unless for long-term care insurance, COBRA continuation coverage, health care coverage while receiving unemployment compensation, or Medicare. Distributions from an HSA not used for qualified medical expenses are included in the account beneficiary’s gross income and subject to a 20 percent additional tax, unless made after the beneficiary reaches age 65, dies, or becomes disabled. The additional tax is not treated as a tax liability for purposes of the alternative minimum tax.
Individuals may elect to pay otherwise allowable medical expenses out-of-pocket and allow the HSA to accumulate contributions and grow tax free. Upon retirement, the individual may reimburse him/herself for all the accumulated allowable expense and the distribution will be tax free. Be sure to save those receipts over the years.
An eligible individual can make a one-time qualified HSA distribution directly from his or her individual retirement account to his or her HSA. The amount that can otherwise be contributed to the HSA for the tax year of the distribution is reduced by the amount contributed from the IRA, and the individual cannot deduct the distribution amount as an HSA contribution. An eligible individual can also roll over distributions from another HSA or Archer MSA into an HSA. The taxpayer does not have to be an eligible individual to make a rollover contribution from an existing HSA to a new HSA. An employer could also make a one-time distribution from an employee’s health FSA or health HRA to the employee’s HSA before January 1, 2012.
Always provide the contribution/distribution statement provided by the HSA sponsor to your accountant or tax return preparer. These distributions must be reported on you tax return even if they have no tax consequence because they are used for qualified medical expenses.