Tax-Advantage Your Health Plan with an HSA

Still reeling from your April 15 tax bill? Now you can tax-advantage your health plan. A high-deductible health plan linked to a health savings account (HSA) can give you tax advantages not available with other health plans.

What Is an HSA?

Qualified individuals can set up a health savings account (HSA) to pay or reimburse certain medical expenses. You must set up this tax-exempt trust or custodial account with a qualified HSA trustee, such as a bank, an insurance company or other organization approved by the IRS to be a trustee of these accounts. To qualify for an HSA, you must meet the following requirements:

• You must have coverage under a high-deductible health plan (HDHP).
• You cannot have other comprehensive health coverage. You can, however receive health benefits under workers’ compensation laws, tort liabilities, or liabilities related to ownership or use of property, and supplemental health plans, such as cancer insurance or critical illness insurance and hospital indemnity plans. You can also have insurance that provides coverage for accidents, disability, dental care, vision care and long-term care.
• You cannot be enrolled in Medicare.
• You cannot be claimed as a dependent on someone else’s tax return.

How Much Can You Contribute?

For 2014, if you have self-only HDHP coverage, you can contribute up to $3,300 to your HSA. If you have family HDHP coverage, you can contribute up to $6,550. Individuals 55 and older can make an additional $1,000 “catch-up contribution.”

Tax Advantages

HSAs confer a combination of tax advantages unavailable with any other health plan:

• You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA, even if you do not itemize your deductions on Form 1040.
• You can exclude contributions your employer makes to your HSA (including contributions made through a cafeteria plan) from your gross income.
• You pay no taxes on interest or other earnings on the assets in the account.
• You can take distributions free of income taxes if you use them to pay qualified medical expenses.

Other Advantages

Accumulation: HSAs have no “use it or lose it” provision—if you don’t use all your funds during the year, they can accumulate year to year until you need them.

• Portability: You can take your account with you if you change employers or retire.
• Flexibility: You can use funds in your account to pay any IRS-qualified medical expense you incur, including health insurance premiums, copayments and deductibles or treatments not covered by your plan. You can also use your balance to pay healthcare expenses in retirement.

Disadvantages

The high-deductible health plans (HDHP) you must have to be eligible for an HSA have higher out-of-pocket expenses than other types of plans. Individuals unaccustomed to budgeting for routine healthcare, such as doctor visits and prescription drugs, could be in for sticker shock. As a consumer-driven plan, an HDHP/HSA plan gives the insured more control over healthcare decisions. This helps control costs and prevent overtreatment, which has its own health risks. However, finding the data you need to make an informed decision can prove challenging, as many healthcare providers do not release information on outcomes or quality of care, and research on the efficacy of many treatments might be out of the reach of laypeople.

HSA funds must be used for qualified healthcare expenses only. If you withdraw funds and do not use them for qualified medical expenses, the money will be included in gross income on your federal income tax form and subject to an additional 10 percent penalty tax. The penalty will be waived in cases of disability or death and for individuals age 65 or older.