Can Your Health Savings Account Fill Multiple Tax Needs?

• Find out how to use your HSA as a retirement account.
• Learn how plans qualify as high-deductible plans.
• Find information about qualifying as an eligible individual.
• Learn the monetary qualification for an HSA.
• Find a qualification chart for your reference.
• Learn about maximum contributions.
• Find out how to establish an HSA.

A health savings account (HSA) is one of the most misunderstood and underused benefits in the Internal Revenue Code. Congress created HSAs as a way for individuals with high-deductible health plans (HDHPs) to save for medical expenses not covered by insurance due to the high-deductible provisions of their insurance coverage.

However, a health savings account can act as more than just a vehicle to pay medical expenses; it can also serve as a retirement account. For some taxpayers who have maxed out their retirement-plan options, an HSA provides them with another resource for retirement savings. This account isn’t limited by income restrictions in the way that IRA contributions sometimes are, but there are qualifications and restrictions that anyone considering an HSA should be aware of. More detail is given below.

Using an HSA for Retirement Savings

Although the tax code refers to these plans as “health” savings accounts, you can also use them for retirement. Why? Because no requirement exists that says you must use these funds to pay medical expenses. Thus, a taxpayer can pay medical expenses with other funds, thus allowing the health savings account to grow (through account earnings and further tax-deductible contributions) until retirement. In addition, should the need arise, the taxpayer can still take tax-free distributions from the HSA to pay medical expenses.

Withdrawals from a health savings account that aren’t used for medical expenses are taxable and – depending on the taxpayer’s age – can be subject to penalty. Once a taxpayer has reached age 65, nonmedical distributions are taxable but not subject to a penalty (the same as for a traditional IRA once the IRA owner reaches age 59½). At the same time, regardless of age, a taxpayer can always take tax-free distributions to pay medical expenses.

Example: Henry is age 70 and has a health savings account from which he withdraws $10,000 during the year. He also has unreimbursed medical expenses of $4,000. Of his $10,000 withdrawal, $6,000 ($10,000 – $4,000) is added to Henry’s income for the year, and the other $4,000 is tax-free.

Eligible Individual

To be eligible for a health savings account in a given month, an individual:

1. must be covered under an HDHP on the first day of the month;
2. must NOT also be covered by any other health plan (although there are some exceptions);
3. must NOT be entitled to Medicare benefits (i.e., generally must be younger than age 65); and
4. must NOT be claimed as a dependent on someone else’s return.

Any eligible individual – whether employed, unemployed or self-employed – can contribute to an HSA. Unlike with an IRA, there is no requirement that the individual has compensation, and there are no phase-out rules for high-income taxpayers. If an employer establishes an HSA, then the employee and/or the employer can contribute. Family members or any other person can also make contributions to HSAs on behalf of eligible individuals. Both employer contributions and employee contributions made via the employer’s cafeteria plan are excluded from the employee’s wage income. Employees who make health savings account contributions outside of their employers’ arrangements are eligible to take above-the-line deductions – that is, they don’t need to itemize deductions – for those contributions.

The Monetary Qualifications for an HDHP

Example – Family Plan Does Not Qualify: Joe has purchased a medical-insurance plan for himself and his family. The plan pays the covered medical expenses of any member of Joe’s family if that family member has incurred covered medical expenses of over $1,000 during the year, even if the family as a whole has not incurred medical expenses of over $2,800 during that year. Thus, if Joe’s medical expenses are $1,500 during the year, the plan would pay $500. This plan does not qualify as an HDHP because it provides family coverage with an annual deductible of less than $2,800.

Example – Family Plan Qualifies: If the coverage for Joe and his family from the example above included a $5,000 family deductible and provided payments for covered medical expenses only if any member of Joe’s family incurred over $2,800 of expenses, the plan would then qualify as an HDHP.

Maximum Contribution Amounts for Health Savings Accounts

The amounts that can be contributed are determined on a monthly basis and calculated by dividing the annual amounts shown below by 12. Thus, if an individual’s health plan only qualified that person for a health savings account for 6 months out of the year, then that person’s contribution amount would be half of the amount shown.

In addition to the amounts shown, an eligible individual who is age 55 and older can contribute an additional $1,000 per year.

Establishing a Health Savings Accounts

An eligible individual can establish one or more HSAs via a qualified HSA trustee or custodian (an insurance company, bank, or similar financial institution) in much the same way that an individual would establish an IRA. You do not need permission or authorization from the IRS. The individual also does not have to have earned income. If employed, any eligible individual can establish an HSA, either with or without the employer’s involvement. Joint HSAs between a husband and wife are not allowed, however; each spouse must have a separate HSA (and only if eligible).

Have questions related to how an HSA could improve your long-term retirement planning or health coverage? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.

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