We all need health
insurance and we all would like to save money and reduce taxes. Health
Savings Accounts can help with all of those objectives.
Health Savings Accounts
(HSAs) are tax advantaged personal savings accounts to be used for medical
expenses created by federal law in 2003. Congress's objectives in creating
these accounts were to encourage all individuals to have medical insurance,
save for current and future medical expenses, reduce the overall costs
of medical care and have individuals take ownership of managing their
medical expenses. In many ways, HSAs for medical expenses are like IRAs
for retirement expenses.
A Health Savings
Account works in conjunction with a High Deductible Health Plan
A "High Deductible Health Plan" (HDHP) is a specific type of
health insurance policy generally does not cover the first several thousand
dollars of health care expenses. These HDHPs are usually available at
lower costs than traditional health insurance policies. You must have
an HDHP to be eligible for a HSA. HSA accounts are not available for those
enrolled in Medicare.
In 2017, the deductible
must be at least $1,300 for individuals or $2,600 for families, and the
annual out-of-pocket expenses cannot exceed $6,550 for an individual or
$13,100 for a family, including the deductible and CO-payments (but not
premiums). There are slightly higher out-of-pocket limits for insurance
plans offered under the Affordable Care Act. Consult your insurance advisor
for more details.
Individuals can buy
high-deductible policies on their own or through their employers. You
should speak with your employer or insurance provider to see if your health
insurance plan qualifies.
Benefits of a Health
With this type of arrangement, you establish a HSA with a financial institution,
make tax deductible contributions to the HSA and use funds from the HSA
to pay medical expenses that are not covered by your HDHP. Funds within
the HSA grow tax free until withdrawn and are never taxed as long as they
are used for qualified health care expenses. Distributions that are not
used for qualified expenses are subject to regular income tax and a 10%
Using a Health
HSAs are available from many financial institutions. They often work like
an interest bearing checking account with a debit card to use to pay medical
expenses. There are also HSAs available from some investment firms and
mutual fund companies that enable you to invest the funds within the HSA.
The amount you can
contribute to an HSA and take as a tax deduction is set by the IRS. The
limits are not impacted by your income level, type of income or whether
you itemize deductions or not. For 2017, the limit is $3,350 for individuals
and $6,750 for those with family coverage. In addition for 2017, an individual
age 55 and above can make an extra contribution of $1,000. If both spouses
are 55 or over, the extra contribution limit is $2,000.
Once you establish
and funds an HSA, you take distributions from it to pay or reimburse qualified
health care costs that are not covered by your insurance. The definition
of qualified health care costs is similar to what the IRS uses for determining
an expense qualifies as an itemized deduction for your tax return.
Key Points to Consider
- The combination
of an HSA and an HDHP requires you to pay the first several thousand
dollars of medical costs.
- Compare the cost
of an HDHP with your existing medical insurance plan. If you decide
to switch to an HDHP, do not cancel your existing insurance until you
are approved for the new plan.
- Establish an HSA
with an institution that provides the type of features you want. Consider
the convenience of a debit card to pay expenses and how you want the
- Keep good records
because they must be used to support the deduction on your tax return.
- The tax rules can
be complex and you may want to consult your tax advisor to learn how
an HSA would work in your situation.
The end result of this type of arrangement is that you have medical insurance
to cover large expenses, you get a tax deduction for your contributions
to the HSA, HSA funds grow tax free and you have funds available for current
and future medical expenses that are not covered by insurance.