Health Saving Account
Why start a Health Savings Account? In today’s world the health insurance policies being offered have high deductibles. (HDHP – high deductible health plan). What is offered today is in a word “catastrophic” health insurance. You the patient are paying the ordinary maintenance costs of going to the doctor.
So how to fund these maintenance costs up to the deductible amount?
One way is to use a Health Saving Account to pay with pretax dollars. Either your employer or you can contribute to a HSA.
If made by your employer, then the contribution is not included in your income.
Or you can take your own pre- tax dollars and make a deductible contribution.
1. You must be presently covered by a HDHP on the 1st day of month you want to set up your HSA account. Now you may ask how do I know if I’m covered by an HDHP. Now days the insurance company in its descriptions of the various plans offered will tell you which of their plans is an HDHP plan.
2. You must have no other health coverage. For example a health insurance program with a low deductible premium (say $500). Now of course there’s always an exception to the rule. So you can have coverages for specific diseases or medical coverage for dental for example, and that will not be considered to have “ other health coverage”.
3. You’re not enrolled in Medicare. Now remember that that means you’re actually enrolled. You could be over 65 and be eligible but just not participate in Medicare, and that would be fine.
4. You cannot be claimed as a dependent on another persons tax return.
5. We spoke above about how you cannot be enrolled in a Medicare program. And there are other programs that will disqualify you or make you ineligible for a health savings account : Medicaid, flexible spending plans, health reimbursement arrangements. Now there are some exceptions even to this rule. For example, if your flexible spending plan commences after you’ve met your deductible then that flexible spending program would be acceptable.
As I mentioned above, the idea of the high deductible health plan is that you are paying for the ordinary “maintenance costs”of healthcare yourself vs. the insurance company.
But your HDHP plan can still qualify and provide preventative care benefits without any deductible. For example preventative care would be immunization, annual checkups, and screening services. So the whole idea with a high deductible health plan program is to provide catastrophic coverage but also to provide an incentive to use wellness programs in order to reduce the high cost of healthcare. So even though the deductible may be very high for these certain types of treatment, the HDHP allows for preventive care. The health insurer wants you to get immunized, so there is no cost or very little cost for that type of medical benefit.
A HDHP has certain dollar requirements regarding premiums. Now these amount are different from the limits on the funding of your HSA.
What we are talking about now is the requirements of the plan itself and we will talk about how much you can contribute into your HSA shortly.
The health plan to be a HDHP plan requires that the deductible has to be at least $1,350 for an individual in 2018. So that means your out-of-pocket costs have to be at least $1,350 before the policy starts to pay. So for example if your insurance policy says that it will start coverage after you reach $800 of out-of-pocket cost, then that plan does not qualify as an HDHP, and thus you cannot have HSA savings account contribution.
Conversely the health plan cannot have a deductible that is so high that it is burdensome on the individual. The maximum amount that you are required to pay out of your pocket before the policy starts covering you as an individual is $6,650. Now the upper and lower limits for families are $2,700 for the amount that you have to pay out of pocket before the policy kicks in and the maximum that you have to pay as a family is $13,300. So for example if your insurance plan said that your deductible is $15,000 for your family that is too high and thus that plan does not qualify as a HDHP plan.
For 2018 for an individual the maximum contribution is $3,450 and $3,500 for 2019 with an additional $1,000 if you are are 55 or older. For a family the maximum contribution in 2018 is $6,900 and $7,000 for 2019,and if you’re over 55 an additional $1,000. You have until April 15 the following year to make your contribution for the prior year.
Keep in mind these amounts are the maximum and if you become HSA eligible during the year you have to calculate 1/12 for each month. (general monthly contribution rule).
Now if you become eligible after January, for example you eligible in September 2018 ( you got a job with an employer who has a HDHP) and are still eligible on December 1, 2018, then you get the full year. So I just said the calculation is on a monthly basis and now it gets confusing because we are now saying you can get the deduction for the full year. There is a catch. For example, you became eligible in September 2018, and you get the full year’s allowable contribution for 2018 to your HSA, but you have to remain eligible for 13 months. So stay eligible from September of 2018 to October 2019, otherwise there is a negative tax result. (Full contribution rule)
If your employer has made a contribution to your HSA account, the dollar amount will be reported on your W-2 on box 12 marked as code W. So it’s quite possible that your employer could make a contribution to your HSA and if that amount did not meet the maximum allowed, then you could also make a contribution and deduct that amount on the front of your 1040 tax return. IRS form 8889 is used to report the HSA contributions made by you and your employer contribution. The form 8889 is also where you report your medical expenses. You need to keep track of those expenses and be able to substantiate those medical expenditures if the IRS ever audits you.
The distributions from your HSA account are reported out by the HSA trustee or custodian on an IRS form 1099 SA.
One of the concerns about a high deductible health plan is that people will not have the dollar amount available to pay for healthcare expenses between the first dollar and reaching the minimum deductible amount under the plan. The idea of the HSA is to be able to put money away for that time when you need to meet this deductible.
During this period of time the money is earning interest or dividends and growing tax-free. Of course the limitation to being tax free is the distribution has to be used for healthcare expenses.
And so the distributions from your HSA, if used for medical expense, are never subject to federal income tax, nor social security, nor medicare tax.
If you are under 65 and you take the money out say to buy a new sailboat and you pay income tax and there is a penalty of 20%. However once you reach age 65 then there is no 20% penalty. So you could take the money out at the age of 66 to go by a sailboat and all you would pay is ordinary income tax.
Neither your employer nor the HSA custodian or trustee (for example you bank or broker) determines whether the payment is for a qualified medical expense. This is one feature that distinguishes the health savings account from other types of programs like the flexible spending plan or the health reimbursement arrangement.
You are responsible for making sure the payments qualify.
Also keep in mind that you cannot pay for medical expenses that occurred prior to the establishment of the HSA account out of the HSA funds. On the other hand you could have medical expenses after the HSA plan was established and wait until a later year to reimburse yourself. I’m not sure why you would do that, but perhaps there were not sufficient funds in the HSA in the earlier years to reimburse you fully.
And of course you do not have to use all the contribution money that you put in any particular year. That is the whole idea. The fund can build up over time to meet future medical expenses that may occur. The other great thing about an HSA account is that if you change jobs the money in the account goes with you.
The HSA actually works to pay for the medical expenses up to the point you reach your deductible under your insurance plan, but also serves as a deferred annuity.
For example if you’re 20 years old, and were contributing $3000 a year to your HSA account and didn’t need the money to pay for medical expenses by the time you were 40 years old there would be $60,000 in that account plus interest, dividends, and appreciation on the stocks bonds are mutual funds that you invested in. And hypothetically another 20 years later there would be $120,000 in the account plus interest, dividends and appreciation. So by the time you reach the age 65 you could easily have $200,000 in the account.
Also keep in mind that if you have a medical bill and are submitting it to the HSA account to be reimbursed, with what are in effect pretax dollars, then your prohibited from deducting that same expense on your schedule a 1040. Since the schedule A medical expenses have to be over 10% of your AGI to be of any benefit, all the more reason for an HSA account. In other words use the HSA pretax dollars to pay for medical expenses, versus trying to get a tax deduction where you are limited on schedule A. Please keep in mind if some other source of funds has reimbursed you for this medical expense than that medical expense is not eligible to be paid out a second time from your HSA account. No double counting.
WHAT HAPPENS TO THE MONEY WHEN YOU DIE
For the living spouse that is the beneficiary of the HSA account as if it were their own, with no immediate tax consequence. For a non-spouse beneficiary the money is immediately taxed.
This is a general discussion and for any question you have on the topic see your own tax preparer.