Prepare for the unexpected.
A Health Savings Account (HSA) is a tax-exempt trust or custodial account established exclusively for the purpose of paying or reimbursing qualified medical expenses for you, your spouse, and your dependents. To learn more about Health Savings Accounts, please read the questions and answers below.
These questions and answers are intended to provide general information concerning the federal tax laws governing HSAs. It is not intended to provide legal advice or to be a detailed explanation of the rules or how such rules may apply to your individual circumstances or under your state laws. For specific information, you are encouraged to consult your tax or legal professional.
Am I Eligible for an HSA?
You are eligible to open an HSA account if:
- Are covered under a high-deductible health plan (HDHP)
- Are not also covered by any other health plan that is not an HDHP (with certain exceptions for plans providing preventive care and limited types of permitted insurance and permitted coverage)
- Are not enrolled in Medicare
- Cannot be claimed as a dependent on another individual’s tax return
What is an HDHP?
An HDHP is a high-deductible health plan with an annual deductible no less than $1,400 for self-only coverage and $2,800 for family coverage. These amounts are as of 2020 and will be modified each year to reflect the change in cost of living. Refer to the IRS website for current amounts or your tax or legal professional.
What are an HSA owner’s responsibilities?
You can establish an HSA in much the same way you would establish an IRA – with a qualified trustee or custodian. Each year, you are responsible for determining your allowable annual HSA contribution and whether you have qualified medical expenses eligible for reimbursement with nontaxable HSA distributions.
Who can contribute to my HSA?
You, your employer, your family members, and any other person (including non-individuals) may contribute to your HSA. This is true whether you are self-employed or unemployed.
How much can I contribute to my HSA?
Contributions are subject to annual cost-of-living adjustments. Catch-up contributions are available for eligible individuals who are age 55 or older by the end of their taxable year and for any months individuals are not enrolled in Medicare. Refer to the IRS website for contribution limits.
May I claim a federal tax deduction for my HSA contribution?
Contributions to an HSA are tax deductible, the earnings grow tax deferred, and distributions to pay or reimburse qualified medical expenses are tax free. You may deduct contributions made by anyone other than your employer as long as they do not exceed the maximum annual contribution amount. Employer contributions are not wages for federal income tax purposes. Rollovers and transfers are from HSAs, IRAs, and Archer medical savings accounts are not tax deductible.
When is the contribution deadline for funding an HSA?
The deadline for regular and catch-up contributions is your federal income tax return due date, excluding extensions, for that taxable year. For most taxpayers, April 15th.
How are HSA distributions taxed?
The qualified medical expenses must be incurred after the HSA has been established. HSA distributions used exclusively to pay for or reimburse qualified medical expenses incurred by you, your spouse, or your dependents are not included in gross income. Any other distributions are included in income unless rolled over. Distributions not used to pay for or reimburse qualified medical expenses or not rolled over are subject to an additional 20% tax unless made after your death, your disability, or your attainment of age 65. HSA custodians/trustees do not determine whether HSA distributions are used for qualified medical expenses.
Is a distribution for non-prescription drugs a qualified medical expense?
A drug or medicine (other than insulin) must be prescribed to be considered a qualified medical expense. You may find details regarding qualified medical expenses by visiting the IRS website.
How is HSA activity reported?
Each year, your HSA custodian/trustee reports to the IRS on form 5498-SA the contributions made to your HSA and on form 1099-SA any HSA distributions you take. In addition, you file form 8889, Health Savings Accounts (HSAs), as part of your federal income tax return to show your HSA contribution and distribution activity.