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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 can 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 $1,350 for self-only coverage or $2,700 for family coverage (amounts for 2018; see table below for 2019 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 can 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 2018 are $3,450 for self-only coverage and $6,900 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 $4,450. For family coverage, a maximum contribution of $8,900 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Amounts withdrawn from the HSA are excludable from gross income, as long as the amounts are used to pay for qualified medical expenses of the taxpayer, spouse and dependents.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 2018, these limits are $6,650 for self-only coverage and $13,300 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 2018 and 2019:

20182019
Limit on HSA Contributions — single$3,450$3,500
Limit on HSA Contributions — family$6,900$7,000
HDHP required minimum deductible — single$1,350$1,350
HDHP required minimum deductible — family$2,700$2,700
HDHP out-of-pocket maximum — single$6,650$6,750
HDHP out-of-pocket maximum — family$13,300$13,500

HSAs can be an exceptional tax-saving tool when utilized correctly. Please contact Selden Fox if you have any questions about health savings accounts or tax planning opportunities.

Nathan Sharp, CPA, MST

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.