By Chris Thornburgh

With the rising costs of health benefits, high-deductible health plans have grown in popularity. If you have one of these plans, you will want to pair it with a health savings account. If you don’t know what an HSA is, you need to know how it can work for you.

WHAT IS AN HSA?

Health savings accounts are like a personal savings account to pay for your current and future medical expenses. A sweet tax perk, HSA contributions also reduce your federal taxable income.

WHO CAN INVEST IN AN HSA?

Individuals who participate in high-deductible health plans are eligible to contribute to HSAs as long as they are not enrolled in Medicare. This begs the question: What is a high-deductible health plan?

For 2018, a high-deductible health plan is an insurance plan that has a minimum deductible of $2,700 for family coverage and $1,350 for self-only coverage. To qualify as high-deductible, it must also have a maximum out-of-pocket exposure of $13,300 for family coverage and $6,650 for self-only coverage. These figures fluctuate slightly each year.

TAX ADVANTAGES OF AN HSA

There are three main tax benefits to participating in an HSA. Qualified contributions are tax-deductible, even if you do not itemize deductions on your tax return. Your money grows tax-free and any money taken out to pay for eligible expenses is also tax-free. Talk about a tax trifecta!

Eligible expenses include a wide range of IRS-approved medical, dental and vision expenses, plus co-pays (see IRS Publication 502). It’s important to note that insurance premiums do not qualify unless the premiums are for long-term care insurance, COBRA or health coverage while receiving unemployment compensation.

Unlike flexible spending accounts, health savings accounts are not a “use it or lose it” investment. Unused balances are carried forward and continue to accumulate tax-free earnings. You own and control the account, so it sticks with you even if you change jobs or employers.

HOW TO INVEST IN AN HSA

It’s common for health insurance providers to offer HSAs. Your employer may also offer an HSA option or you can open an account at most financial institutions. Each year, you decide how much to contribute, not to exceed annual limitations.

Contribution limits for 2018 are $6,900 for family coverage and $3,450 for self-only coverage. Catch-up contributions of an additional $1,000 can be made by eligible participants who will turn 55 by year-end. Contribution limits for 2017 are $6,750 for family coverage and $3,400 for self-only coverage.

Once you are over age 65 and enrolled in Medicare, you can no longer contribute to an HSA, but you still have use of the account for medical expenses. When you reach 65 or you become disabled, you can use HSA funds for any purpose without penalty. Funds used for nonmedical purposes are subject to income tax, however.

WHEN ARE CONTRIBUTIONS DUE?

The deadline for your HSA contributions is the tax filing deadline (without extensions) for the tax year in which your contributions will apply. This means for 2018, the contribution deadline is April 15, 2019.

This also means that it is not too late to make your contribution for 2017. You can contribute as late as April 17, 2018, to count as a 2017 tax deduction. However, you must have qualified as an eligible individual as of Dec. 1, 2017, in order to contribute to your HSA. Reach out to your CPA to confirm if you qualify and how much you should contribute.

THE BOTTOM LINE

Health savings accounts are a valuable tax-savings tool. If you meet the qualifications, don’t miss out on this opportunity. 

Chris Thornburgh is a CPA and partner at Brown Armstrong Accountancy Corp. Contact her at cthornburgh@bacpas.com or 324-4971. The views expressed in this column are her own.

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