Health Savings Accounts

We all need health insurance. Likewise, we all like to save money and reduce our taxes. Health savings accounts (HSAs) can help with both of these goals.

Created by federal law in 2003, health savings accounts are tax-advantaged personal savings accounts to be used for medical expenses. Congress had a few objectives when they created these accounts: To encourage all individuals to have medical insurance; to save for current and future medical expenses; to reduce the overall costs of medical care; and to encourage individuals to take ownership of managing their medical expenses. In many ways, HSAs for medical expenses are like IRAs for retirement expenses.

An HSA works in conjunction with a high-deductible health plan (HDHP). An HDHP is a specific type of health insurance policy that generally does not cover the first several thousand dollars of healthcare expenses. These HDHPs usually have lower monthly premiums than traditional health insurance policies. You must have an HDHP to be eligible for an HSA. HSAs are not available for those enrolled in Medicare.

In 2017, the deductible must be at least $1,300 for individuals or $2,600 for families and the annual out-of-pocket expenses cannot exceed $6,550 for an individual or $13,100 for a family, including the deductible and copayments (but not premiums).

Individuals can buy high-deductible policies on their own or through their employers. If you are interested in setting up an HSA, you can speak with your employer or insurance provider to see if your health insurance plan qualifies.

If you do qualify, then you can establish a HSA with a financial institution, make tax-deductible contributions to the HSA and use funds from the HSA to pay medical expenses that are not covered by your HDHP. Funds within the HSA grow tax-free until withdrawn and are never taxed as long as they are used for qualified healthcare expenses. Distributions that are not used for qualified expenses are subject to regular income tax and a 10 percent penalty.

Many financial institutions offer HSAs. The account often works like an interest-bearing checking account with a debit card you can use to pay medical expenses. There are also HSAs available from some investment firms and mutual fund companies that enable you to invest the funds within the HSA.

The IRS sets the amount you can contribute to an HSA and take as a tax deduction. Your income level, type of income, or whether or not you itemize your deductions does not affect the limits.

For 2017, the contribution limit is $3,350 for individuals and $6,750 for those with family coverage. In addition, for 2017, an individual age 55 and above can make an extra contribution of $1,000. If both spouses are 55 or over, the extra contribution limit is $2,000.

Once you establish and fund an HSA, you can take distributions from it to pay or reimburse qualified healthcare costs that are not covered by your insurance. The definition of qualified healthcare costs is similar to what the IRS uses to determine if an expense qualifies as an itemized deduction for your tax return.

With an HDHP and HSA arrangement, your medical insurance will cover large expenses and you’ll get a tax deduction for your HSA contributions. HSA funds grow tax-free and you’ll have funds available for current and future medical expenses that are not covered by insurance.

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