As health insurance premiums get increasingly expensive, employers are looking to shift costs to their employees. They do this by having a high deductible health plan (HDHP). These plans have lower monthly premiums in exchange for higher annual deductibles. The employee pays for these deductibles. To help pay for these costs in a tax-efficient manner, Congress enacted the Health Savings Account (HSA), which became law on December 8, 2003. Happy 20th birthday!!
What is a Health Savings Account?
An HSA is a tax-preferred account allowing individuals to save money to pay for their medical expenses. The HSA belongs to the employee, so if you change jobs, you can keep the HSA.
Who qualifies for HSA?
An eligible individual has a qualified HDHP, has no other health coverage, is not enrolled in Medicare, and is not claimed as a dependent on someone else’s tax return.
How much money can I contribute to my HSA?
The maximum contribution to an HSA in 2023 is $3,850 for individual plans and $7,750 for family plans. Taxpayers 55 or older can contribute an extra $1,000, a catch-up contribution. These contributions are tax-deductible. Unlike a flexible spending account (FSA), contributions do not have to be withdrawn or used during the tax year. The money can stay in the account and grow tax-free until distributions are made.
How are withdrawals from the plan handled?
Distributions are tax-free, provided they are used for qualified medical expenses. These expenses include deductibles, co-pays, dental, vision, prescription drugs, and psychiatric care. You can’t spend the money on insurance premiums. There are three exceptions to this rule; the first exception is for Medicare premiums for taxpayers 65 or older. The second exception is for health insurance provided by COBRA when receiving unemployment compensation. The third and final exception is for long-term care insurance. Medicare supplemental insurance or Medigap policies are not qualified medical expenses.
What happens if I spend the money on non-medical expenses?
Any distributions taken from the account and spent on non-qualified medical expenses are subject to income taxes and a 20% penalty. Once you turn 65, the penalty is eliminated, but you’re still taxed on the distribution.
What happens to the account when I die?
When you open the account, you must designate a beneficiary who will receive the money when you die. Your beneficiary choice will determine how the account is treated when you’re gone. If your beneficiary is your spouse, the account remains a Health Savings Account. If your beneficiary is someone other than your spouse, then the HSA is terminated on the date of death, and the total value becomes taxable to the beneficiary. You can also name a charity as a beneficiary of the account. The proceeds from the account will be sent to the charity tax-free.
The health savings account is one of the most powerful savings tools available. The contributions are tax-deductible, the money grows tax-free, and distributions can be tax-free. You should check with your tax advisor to ensure you’re contributing the max to this account.
If you would like to discuss your business or personal tax planning, tax preparation, and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton, PA office to discuss your situation. You can also schedule a consultation at Click Here.
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About Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS-licensed Enrolled Agent and a Certified Tax Resolution Specialist who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA. This includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, and West Chester. We also serve clients in Delaware, New Jersey, New York, and throughout the United States.
Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.
