A health savings account (HSA) provides a tax benefit for amounts that are contributed and used to pay qualified medical expenses of the account beneficiary, his or her spouse, and dependents. Contributions to the HSA account generally are either deductible or excluded from income. Distributions made from the account are not included in gross income if they are used exclusively for qualified medical expenses. HSAs can be established by an employee through an employer’s cafeteria plan or by an individual outside the employment context.
Eligibility and Definitions
An individual is eligible to establish an HSA in any month if: (1) he or she is covered by high-deductible health plan (HDHP) on the first day of the month; (2) is generally not covered by any other health plan or enrolled in Medicare; and (3) cannot be claimed as a dependent on another taxpayer’s return. A HDHP for this purpose is a plan with (1) an annual deductible of at least $1,350 for 2019 for self-only coverage or $2,700 for 2019 for family coverage and (2) an annual out-of-pocket expenses limit of $6,750 for 2019 for self-only coverage or for family coverage.
Contributions and Reporting
Cash contributions may be made to an HSA by the eligible individual, the individual’s employer, or any other person on behalf of the eligible individual. Contributions made by an individual outside the employment context are deductible as an above-the-line deduction in calculating adjusted gross income. Employer contributions to an employee’s HSA may be excluded from the employee’s gross income. The maximum amount that can be contributed for 2019 is $3,500 for self-only coverage or $7,000 for family coverage.
The contribution limit is increased $1,000 if the individual reaches age 55 by the end of the tax year. The annual limit applies to all HSAs of the eligible individual combined, and all contributions made by anyone to the accounts. Contributions cannot be made after the participant attains age 65 or is enrolled in Medicare.
An individual must report all contributions and distributions to their HSA on Form 8889. Additionally, the individual establishing the HSA is responsible for determining whether HSA distributions are used exclusively for qualified medical expenses and for maintaining adequate records to substantiate such usage.
Distributions from HSA
Distributions from the HSA for the account beneficiary can be used for qualified medical expenses. Qualified medical expenses include expenses incurred only to the extent they are not paid for by insurance or otherwise, for diagnosis, cure, mitigation, treatment, or prevention of disease; transportation primarily for and essential to such care; drugs; and qualified long-term care expenses. Nonprescription drugs, subject to limitations, are considered qualified medical expenses.
There is no time limit on when distributions must occur, and the account owner may defer to use it in later years for qualified medical expenses. Any amount distributed from a HSA that is not used exclusively to pay qualified medical expenses of the account beneficiary (or his spouse or dependents) must be included in the account beneficiary's gross income and can be subject to an additional 20 percent tax.
Please contact our office to review the benefits and tax savings of a HSA for medical expenses.