HSA for December 16, 2017

Do I Qualify for an HSA?

Health Savings Accounts – a special kind of savings vehicle that allows qualified individuals to save pre-tax for health-related expenditures – are getting more and more popular. Rising health insurance premiums have led consumers to look around for ways to control their health insurance premiums – and health savings accounts, when coupled with a high deductible health plan, are a proven way to take the edge off of health insurance expenditures for many families.

As of 2011, over 10 million individuals and families get their coverage via high-deductible health plans, according to data from the Henry J. Kaiser Family Foundation, through a mix of individually-purchased plans and workplace plans.

So What’s the Catch?

Well, not everyone is qualified to participate in a health savings account. Congress restricted the benefits of these plans to a certain group of people:

  1. You must not be covered under another health care plan. You must also not be eligible for coverage via your spouse’s plan. Congress specifically limits HSAs to those who have no other major medical coverage. However, you can have other types of health insurance coverage and still contribute to an HSA. For example, you can own a disability income policy, a long term care insurance policy, or a so-called “dread disease” policy that pays out a benefit if you are diagnosed with a specific ailment such as cancer. You just cannot own or be eligible for an existing major medical plan such as an indemnity plan, HMO or PPO plan. Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers).
  2. You must not be currently enrolled in Medicare. In practice, this means that those over age 65 are generally ineligible to contribute to a health savings account, since you are automatically enrolled in Medicare Part A and B at age 65.
  3. You must have coverage under a qualified high deductible health plan. This is a specially-certified kind of major medical plan which, as of 2012, has an annual deductible of be at least $1,200. Moreover, the maximum annual deductible and other out-of-pocket expenses cannot be more than $6,050. For plans that cover your whole family, the minimum annual deductible is $2,400, with a maximum annual out-of-pocket expense of $12,100.
  4. Finally, you must not be eligible to be claimed as a dependent on someone else’s income tax return. For some young adults still enrolled in college, this may be a factor. However, a recent change to health insurance rules allows young adults to be covered under their parents’ plans to age 26, under certain circumstances.

How Much Can I Contribute?
For tax year 2012, owners of individual high-deductible health plans can contribute up to $3,100 per year to a health savings account, pre-tax. Owners of family plans can contribute up to $6,250 per year. Contributions to these plans are deductible in the current year, and grow free of income and capital gains tax. If you withdraw money to pay for qualified health care expenses, the distributions are tax-free. However, if you withdraw the money for any other purpose, you will have to pay income tax, plus a stiff additional penalty of 20 percent. Between federal and state income taxes, plus your 20 percent penalty on the withdrawal, you could lose half of your withdrawal – so be sure to explore other options before raiding your health savings account for non-qualified expenses!