A “Health Savings Account” (HSA’s) is an account established by an “eligible individual,” or an employer, for “eligible individuals,” for the purpose of paying for qualified medical expenses of a Plan Member or their eligible dependents. As of January 1, 2004, individuals enrolled in a high-deductible health plan (“HDHP”) may establish a Health Savings Account (HSA) in which the money deposited may be used for qualified health care costs in a tax deferred account. Amounts contributed to an HSA by an individual belong to the individual and are completely portable. The remaining balance of an HSA would be carried over each year and remain interest tax-free, just like an IRA. HSA owners between the ages of 55 and 65 are allowed catch-up contributions ($1,000 in 2022) to their HSA. Employer contributions to employee HSAs are not subject to FICA taxes.
Anyone (not just small businesses or self-employed) with a qualified high deductible insurance plan will be eligible for a tax-deductible HSA. You must not be covered by another health insurance plan (other than a plan providing certain limited types of coverage).
High Deductible Health Insurance Plans (HDHP)
An HDHP is a health plan that has an annual deductible of at least $1,400 for individuals and a $2,800 deductible for families (2022).
The funds held in an HSA are tax-deferred. Distributions of or withdrawals from an HSA for qualified medical expenses are not taxable. Only withdrawals for reasons other than qualified medical expenses prior to age 65 are taxable and subject to a 10% penalty. Distributions upon death, disability, age 65 or Medicare eligibility can be withdrawn for non-medical reasons without a penalty, but the distributions will be subject to an income tax.
Account Holder Responsibilities
The Account Holder has the responsibility for monitoring his/her own HSA. As defined in Section 213(d) of the Internal Revenue Code, only those qualified medical expenses as defined therein, are deductible. Also, it is the requirement of the Account Holder not to go beyond the maximum allowable contribution. The Account Holder is also responsible for maintaining the proper records verifying his/her distributions (retaining receipts for eligible qualified medical expenses).
Benefits of an HSA
- Tax deferred funds
- Great retirement planning for tax deferred funds
- Access to tax deferred funds 24/7 with a debit card/check request
- Individually owned and maintained
- Tax deferred transfers upon divorce, separation
- No penalty upon death of account holder of an HSA
- Contributions can be made by an eligible individual and employers
- Unused funds remain in the account year after year (NO USE OR LOSE!)
- You pay as you incur medical expenses – retain your receipts after payment for tax purposes
- You will receive an annual statement of your HSA for IRS reporting