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A health savings account (HSA) is an important tool that qualified taxpayers can utilize to save money on medical expenses. An HSA allows taxpayers with a high-deductible health insurance plan to contribute pre-tax dollars to a plan and then pay qualified medical expenses from the plan. An HSA differs from a flexible spending account (FSA) in that taxpayers are allowed to accumulate contributions in the plan and do not lose the amounts invested at the end of the year. In order to qualify for an HSA, there are certain requirements that must be met and limits on how much can be contributed each year.

Requirements

The first requirement is that the taxpayer must be covered under a high-deductible health plan (HDHP). For this purpose, the IRS defines an HDHP as a plan with a minimum annual deductible of $1,200 for self-only coverage or $2,400 for family coverage (amounts for 2012; see table below for 2013 amounts).

The other requirements are as follows:

  • The taxpayer cannot be covered by another plan that is not an HDHP.
  • The taxpayer must not be enrolled in Medicare.
  • The taxpayer cannot be claimed as a dependent on another person’s tax return.

Contributions

Taxpayers are allowed to contribute a maximum amount to an HSA during the year. The maximum amount depends on the following:

  • The date when the taxpayer became an eligible individual
  • The date when the taxpayer ceases to be an eligible individual

The maximum contribution amounts for 2012 are $3,100 for self-only coverage and $6,250 for family coverage. If the taxpayer is over the age of 55 by the end of the tax year, they are allowed an additional $1,000 contribution. For self-only individuals, this increases the maximum contribution amount to $4,100. For family coverage, a maximum contribution of $8,250 can be made when both spouses are above the age of 55. Once the taxpayer reaches the age of 65 and is enrolled in Medicare, they are no longer allowed to make contributions to their HSA.

Distributions

Amounts withdrawn from the HSA are excludable from gross income, as long as the amounts are used to pay for qualified medical expenses of the taxpayer, spouse and dependents. These expenses include amounts paid to physicians, surgeons, dentists and other medical practitioners, as well as insurance copayments and deductibles. They also include the costs of equipment, supplies, medicines or drugs that require a prescription, and insulin. Items not included are over-the-counter medicines or drugs, vitamins, or other items that are merely beneficial to general health.

The plan has a maximum limit on the amount of out-of-pocket expenses (described above) payable during the year. For 2012, these limits are $6,050 for self-only coverage and $12,100 for family coverage.

Amounts withdrawn and not used to pay for qualified medical expenses will be subject to tax and an additional 20% penalty. Once the taxpayer has reached the age of 65, any distributions that are not used for qualified medical expenses will be subject to tax, but not the additional 20% penalty.

Below is a table listing the contribution limits, HDHP required minimum deductible and HDHP maximum out-of-pocket expenses for 2012 and 2013:

2012 2013
Limit on HSA Contributions — single $3,100 $3,250
Limit on HSA Contributions — family $6,250 $6,450
HDHP required minimum deductible — single $1,200 $1,250
HDHP required minimum deductible — family $2,400 $2,500
HDHP out-of-pocket maximum — single $6,050 $6,250
HDHP out-of-pocket maximum — family $12,100 $12,500

HSAs can be an exceptional tax-saving tool when utilized correctly.

Nathan Sharp

Nathan Sharp works with a variety of firm clients, including individuals, family businesses, business owners, and various corporations. He earned his BS in accountancy, his master’s in accounting science, and his MST from Northern Illinois University.