What is the contribution limit for an HSA?
Starting in 2019, the annual contribution limit will be $3,500 for an individual, and $7,000 for a family. If you are 55 or older but younger than 65, you can make catch-up contributions up to an additional $1,000.
What other insurance can you have?
First, you must be enrolled in a HDHP, but you can carry other “permitted insurance.” These insurances include accident, disability, dental, vision, specific disease management, wellness programs and long-term care. A limited-purpose FSA (such as that which can be used to pay for dental and vision coverage only) would be allowed, but not a general-purpose FSA that could be used to reimburse someone for the broader spectrum of medical expenses. A separate prescription drug plan–or rider–covering the cost of prescription drugs before the minimum annual deductible of the HDHP is met, is considered another health plan, and therefore, not allowed.
How may HSA contributions be invested?
Amounts contributed may be invested in bank accounts, stocks, bonds, mutual funds and certain other approved investments. Essentially, these are the same permissible investments as for IRAs. In many instances, a custodian may mandate that HSA funds remain invested in a money market account until the balance exceeds a stipulated amount. Only then can an individual invest in the mutual funds or other allowable investments.
What is the tax treatment of contributions to an HSA?
Contributions made by or on behalf of an eligible individual (such as by family members) are deductible at the federal income tax level by the individual, irrespective of whether the individual itemizes deductions. State law will determine treatment for state tax purposes. Contributions made on behalf of another person are also subject to federal and state gift tax rules.
As a company benefit, employers may contribute to HSAs. Any contributions that are made by an employer are excludable from an employee’s gross income for income and employment tax (FICA) purposes. Employee salary reduction or contributions to an employee’s HSA through an employer’s cafeteria plan are treated as employer contributions and, thus, are excludible from income. Investment earnings within an HSA are not federally taxable as they accrue or are earned.
What is the tax treatment for distributions from an HSA?
Distributions from an HSA are excludable from gross income for federal tax purposes if they are made for qualified medical expenses. Distributions for such medical expenses incurred after the account was opened can be made at any time; thus, the individual need not be covered by an HDHP at the time distributions are made for them to be tax‐free. It is the responsibility of the individual who establishes an HSA to maintain records of expenses sufficient to show that distributions were made exclusively for qualified medical expenses.
Distributions that are not made for qualified medical expenses are subject to federal income tax and a 20% penalty tax. This penalty tax is waived, however, in the case of death, disability or upon reaching Medicare eligibility age (age 65). So if you think of all or some your HSA as a retirement fund, it can be very advantageous, as your distributions at age 65 can be used for qualified medical expenses tax-free, and for other expenses without incurring the 20% penalty.
Savings for the long run
Because HSAs are linked to the use of a HDHP, chances are that some of your savings will be used for medical expenses over the course of each year. However, if you fund the HSA aggressively and don’t have high medical expenses, your HSA can grow year over year. Considering the triple-tax advantage, this is one of the most powerful savings tools available.
Jonathan Barber, vice president at Ayco, sums up the advantages of HSAs like this, “There’s no greater tax-favorable account than an HSA. Your 401(k)? No. Your IRA? Definitely not. An HSA is the most tax-favored account there is.”
