According to Willis Towers Watson, nearly half of the employees enrolled in a qualified high deductible health plan (HDHP) in 2017, did not contribute their own money to a Health Savings Accounts (HSAs). It is important to educate employees and help them understand what an HSA is and the benefits of setting aside pretax money for qualified medical expenses.
HSA Eligibility
For an individual to open an HSA and make tax-free contributions, you must meet the following requirements:
- You must be covered under a qualified HDHP on the first day of the month, in which you open or contribute to an HSA.
- You must have no other health coverage except for what is permitted by the IRS.
- You cannot be enrolled in Medicare.
- You cannot be claims as a dependent on someone else’s tax return.
Tax Benefits
An HSA is the crown jewel of tax deferred accounts. It combines the advantages of both a traditional and Roth retirement account, while offerings three separate tax benefits. Contributions to an HSA are not taxed. Funds in an HSA grow tax-free. And distributions for qualified medical expenses are not taxed.
HSA Covered Expenses
Funds you withdraw from your HSA are tax-free when used to pay for qualified medical expenses as described in Section 213(d) of the Internal Revenue Service Tax Code. The expenses must be used to alleviate or prevent a physical or mental defect or illness, including dental and vision. Check out the list of qualified medical expenses.
Use An HSA For Retirement
Use your HSA to save for retirement. What if you don't have sufficient medical expenses to exhaust the HSA balance? In these circumstances an HSA acts like a traditional IRA. Distributions can be made from an HSA for non-medical expenses. These distributions will be taxed, just like a traditional IRA. For those 65 and older, however, there is no 20% penalty levied. With an HSA, you need to be 65 or older to avoid the penalty, not 59 1/2, which applies to IRA and 401k accounts.
HSA Used With Other Insurances
If you change insurance plans, you don’t need to close your HSA, even if your new plan is not a qualified HDHP. While you can no longer make contributions to your HSA, you can still use your HSA funds to reimburse eligible medical expenses incurred under your new healthcare plan. You may also use your HSA dollars to pay for the qualified medical expenses of tax dependent family members, regardless of their health plan structure.
Pay For COBRA And Medicare Premiums
An HSA generally cannot be used to reimburse the cost of health insurance premiums. One exception to this rule is the cost of COBRA. These costs can be reimbursed with an HSA, according to the IRS.
Another exception to this rule is Medicare Premiums. HSA funds can be used by Medicare beneficiaries to pay premiums for Medicare Part B, a Medicare Advantage plan (Part C), a prescription drug plan (Part D), and long-term care insurance. A Medicare supplemental policy, such as Medigap, is not an eligible expense.
Catch-up Contribution
Most are familiar with the catch-up contributions available in a 401k or IRA. You may not realize, an HSA also offers a catch-up contribution provision. Those 55 or older can contribute an extra $1,000, on top of the annual contribution limit, to an HSA.
HSA Limits For 2018
For the 2018 calendar year, individuals enrolled in a HDHP with self-only coverage may contribute $3,450 to their HSA, while those with family coverage may contribute $6,900 to their HSA.
Invest The Balance
Funds in an HSA can be invested in mutual funds. The best HSA accounts offer low cost index funds as investment options. For those looking to invest their HSA dollars, the investment options are a key consideration when selecting an HSA administrator. Here are a list of options.
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