The cost of healthcare is rising. As a result, many people are on the hunt for a more cost-effective way to pay for their medical bills.
If you’re eligible, a Health Savings Account (HSA) may offer a way to set aside funds for a future medical “rainy day” while also enjoying tax benefits, like:
- Withdrawals from the HSA to cover qualified medical expenses aren’t taxed
- Earnings on the funds in the HSA aren’t taxed
- Contributions made by your employer aren’t taxed to you
- Contributions made by you are deductible within certain limits
Who is eligible for an HSA?
HSAs may be established by, or on behalf of, any eligible individual.
If you’re covered by a “high deductible health plan,” you may be eligible for an HSA. In 2023, a health plan with an annual deductible of at least $1,500 for self-only coverage or at least $3,000 for family coverage may be considered a high-deductible plan.
In 2024, these numbers will increase to $1,600 for self-only coverage and $3,200 for family coverage.
Deductible contributions are limited to $3,850 for self-only coverage in 2023 and $7,750 for family coverage. (Again, these numbers are set to increase in 2024 to $4,150 for self-only coverage and $8,300 for family coverage.)
Other than for premiums, annual out-of-pocket expenses required to be paid can’t exceed $7,500 for self-only coverage or $15,000 for family coverage in 2023. In 2024, these numbers will climb to $8,050 and $16,100, respectively.
If an individual (or their covered spouse) is an eligible HSA contributor and turns 55 before the end of the year, they may make additional “catch-up” contributions for 2023 and 2024 up to $1,000 per year.
Limits on deductions
Deductible contributions aren’t governed by the annual deductible of the high deductible health plan. You can deduct contributions to an HSA for the year up to the total of your monthly limitation for the months you were eligible.
The monthly limitation on deductible contributions for someone with self-only coverage is 1/12 of $3,850 (or just over $320) in 2023. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $7,750 (or just under $646).
At tax time, anyone eligible on the first day of the last month of the tax year will be treated as eligible for the entire year. This is relevant to computing the annual HSA contribution.
That said, if the individual is enrolled in Medicare, they’ll no longer be eligible per the HSA rules and can no longer make HSA contributions.
Taxpayers may withdraw funds from an IRA and transfer them tax-free to an HSA—but only once. The amount allowed varies, depending on the maximum deductible HSA contribution for the type of coverage that is in effect at the time of transfer.
The amount moved between the accounts will be excluded from gross income and thus won’t be subject to the early withdrawal penalty of 10%.
HSA Distributions
Distributions from your HSA account that you use to pay for qualified medical expenses of those covered aren’t taxed. Typically, the qualified medical expenses in question would qualify for the medical expense itemized deduction.
However, funds withdrawn from your HSA for other reasons are taxed. Unless the person covered by the HSA is over 65, disabled, or dies, they will also be subject to an extra 20% tax.
Questions? Smolin can help.
HSAs offer a very flexible option for providing health care coverage. However, as you can see, the rules can be quite complicated.
If you have questions about tax rules regarding your HSA or the most favorable way to manage the funds within it, please reach out. The friendly accountants at Smolin are always happy to walk you through your options and help you determine the most tax favorable way to manage your money.