A Health Savings Account, with its potential triple tax benefits, can be a powerful way to save for healthcare-related expenses in retirement. Who can open an account, and what are the qualifications? Find the answers to your HSA questions below.
1. What is a Health Savings Account (HSA)?
An HSA is like an IRA for health care expenses. It allows you to control costs by reducing health insurance premiums and putting money into an account to pay for current and future health care expenses. Contributions can be made to the account annually with pre-tax dollars, subject to limitations, much like contributions to IRAs. Contributions and earnings in the account can be withdrawn to pay for qualified medical expenses at any time without tax consequence.
2. Can anyone set up a Health Savings Account?
HSAs have eligibility rules. To be eligible for an HSA, you must:
Be covered by a High Deductible Health Plan (HDHP)
Not be covered by any other health insurance
Not be entitled to Medicare benefits
Not be claimed as a dependent on another person’s tax return.
There are some qualifications. If you are covered by an HDHP, but have insurance policies that cover specific injuries or diseases, you are not disqualified. The same is true of Accidental Death and Disability coverage, long-term care coverage, dental care plans, and vision plans.
3. What is a High Deductible Health Plan?
An HDHP has been defined by the IRS as a health plan with a minimum deductible of $1,500 for an individual plan and $3,000 for family coverage. An HDHP must also have out-of-pocket expenses, like deductibles and co-pays, which don’t exceed $7,500 for individual plans or $15,000 for family coverage in 2023. Out-of-pocket expenses can be higher for services that are provided outside the plan network.
4. How much can I contribute to my account?
If you have a self-only account, you may contribute up to $3,850 to an HSA in 2023. If you have a family plan, you may contribute up to $7,750 in 2023. A catch-up provision allows account holders age 55 to 65 to contribute an additional $1,000 per year.
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Funds in a self-directed HSA can be invested in the same manner as other self-directed retirement accounts – meaning you’re not limited to stocks, bonds, and mutual funds. Returns on the investments are added to the account and accumulate tax-free.
Returns are not considered contributions and don’t count toward the contribution limits.
6. What happens when funds are withdrawn from the account?
Funds can be withdrawn, tax-free, from an HSA at any time as long as they are used to pay qualified medical expenses. If used for any purpose other than qualified medical expenses, those funds are subject to a 10-percent penalty and are taxed at ordinary income tax rates for account holders under the age of 65.
If you are over the age of 65, funds withdrawn and used for purposes other than qualified medical expenses are taxed at ordinary income tax rates, but aren’t subject to the 10-percent penalty.
7. What costs are considered qualified medical expenses?
The IRS defines qualified medical expenses as medicine, doctor’s visits, diagnostic and treatment services, long-term care and some health care insurance premiums. See examples of covered expenses here. For additional information, please see IRS Publication 502.
8. Whose responsibility is it to ensure that HSA distributions are actually used to pay qualified medical expenses?
It’s your sole responsibility as the account holder. It’s not the obligation of the account custodian.
9. Are the distributions reported to anyone?
Yes, the distributions are reported annually to the IRS by the account custodian using forms 1099-SA and 5498-SA. The custodian is not responsible for reporting how the funds were spent. That’s the obligation of the account holder. With that in mind, you should keep good records and retain all receipts and statements. You must file Form 8889 and file it with your Form 1040 if you (or your spouse, if married filing a joint return) had any activity in your HSA during the year. You must file the form even if only your employer or your spouse’s employer made contributions to the HSA.
10. Can I leave the account to another individual upon death, as with an IRA?
Yes. If your spouse is the person inheriting the account, the account can remain classified as an HSA. If the inheriting person is not a spouse, the account will no longer be treated as an HSA and the fair market value of the account becomes taxable to the beneficiary in the year of your death.
11. What is the contribution deadline for HSAs?
As with an IRA, contributions into an HSA may be made until April 15 (or tax filing deadline) for the prior tax year.
12. How have HSA rules changed in response to COVID-19?
As part of the CARES Act, the list of qualified medical expenses for using an HSA was expanded. Items added include feminine hygiene products and certain over-the-counter medications. The rules apply to items purchased after December 31, 2019.
An additional, temporary rule change affects High Deductible Health Plans (HDHPs). Under the CARES Act, telehealth services may be covered by an HDHP that has a deductible or below the minimum deductible otherwise required. The new rule applies to services provided on or after January 1, 2020.
Video: Self-Directed HSA FAQ
13. What are the primary advantages of Health Savings Accounts?
HSAs allow you to provide for current and future uncovered medical expenses without having to worry about losing unused funds at year’s end, as you would with some savings plans.
You may choose your custodian and the types of investments used to help the account grow.
You decide how much to contribute in any one year, up to the contribution limits.
You make the decision to pay current expenses from the HSA or to save the money for future expenses.
Accounts are completely portable. You may leave one employer and move to another without losing control of the account.
However, if your employer has a low deductible plan, you won’t be able to contribute to the HSA but can still invest current funds.
14. What are the tax benefits of HSAs?
Contributions to the account are above-the-line deductions.
Contributions accumulate in the account tax-free.
Returns on investments in the account also accumulate tax-free.
Distributions are made from the account tax-free, provided that they’re used for qualified medical expenses.
A tax consequence will occur if the funds are withdrawn and used for something other than qualified medical expenses. Even then, for those over the age of 65, the funds are taxed at ordinary income tax rates.
15. Are HSA contributions tax-deductible?
Yes, but only those contributions made by the individual. Employer contributions aren’t tax-deductible.
16. How do I open a self-directed HSA?
A self-directed HSA can be opened by completing an application. Click here to get started.
For more information on HSAs and how one can be established for you, start a conversation with a knowledgeable account counselor.
1
What types of accounts does Equity Trust offer?
Equity Trust offers a variety of IRAs, as well as other self-directed accounts, including: Equity Trust
Traditional IRA
Roth IRA
SIMPLE IRA
SEP IRA
Solo 401(k)
Roth Solo 401(k)
Health Savings Account (HSA)
Coverdell Education Savings Account (CESA)
2
What is the Annual Maintenance Fee for a CESA or an HSA account?
As with other IRA accounts, the market value of the accounts’ assets determines the annual maintenance fee.
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