A health savings account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA. Health savings accounts are tax-advantaged medical savings accounts that you can draw money from for certain medical expenses. They work a bit like a 401k, but money is tax-free in and tax-free out. They are very useful in this respect as they can drop your MAGI, help you pay fewer taxes, and help you qualify for more assistance.
Why use an HSA in 2017?
No permission or authorization from the IRS is necessary to establish an HSA. You set up an HSA with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider. The IRS provided the inflation-adjusted HSA contribution limits effective for calendar year 2017, along with minimum deductible and maximum out-of-pocket expenses for the high-deductible health plans (HDHPs) that HSAs are coupled with.
Registering an HSA and Making an HSA
An HSA is always in an individual’s name. There are no joint HSAs, even when the HSA is linked to a family coverage HDHP and subject to the higher family coverage contribution limit. Some employer plans include an “employee plus one” tier in addition to self-only and family coverage. An “employee plus one”—such as an eligible employee and her dependent child—would fall under the HSA family coverage limits.
2017 HSA Contribution Limits
Health Savings Accounts (HSA) must be established by the tax filing deadline (without extensions) for the tax year in which your qualifying contribution(s) will apply. Any eligible individual can contribute to an HSA. For an employee’s HSA, the employee, the employee’s employer, or both may contribute to the employee’s HSA in the same year as long as the aggregate contributions are under the contribution limit. Family members (or any other person) may also make contributions on behalf of an eligible individual. Contributions must be made in cash. Contributions of stock or other property are not allowed. HSAs can be funded with rollovers or transfers from an Archer MSA.
A one-time qualified HSA funding distribution may be made from your Traditional or Roth IRA to your HSA. The maximum amount depends on your type of coverage (single or family). The distribution is not included in your income, is not tax deductible, and reduces the amount you can contribute to your HSA.
2017 Annual HSA Contribution Limits
For calendar year 2017, the annual HSA contribution limits are:
- Individuals (self-only coverage) – $3,400 (up $50 from 2016)
- Family coverage – $6,750 (no change from 2016)
2017 HDHP Minimum Required Deductibles
For calendar year 2017, the High Deductible Health Plan (HDHP) required deductibles for an HSA are:
- $1,300 for self-only coverage (no change from 2016)
- $2,600 for family coverage (no change from 2016)
2017 HDHP Out-of-Pocket Maximum
The annual out-of-pocket expenses include deductibles, co-payments, and other amounts, but not premiums.
For calendar year 2017, the out-of-pocket maximums are:
- $6,550 for self-only coverage (no change from 2016)
- $13,100 for family coverage (no change from 2016)
If you use an HSA to pay for unqualified medical expenses, the tax penalty is 20 percent of the HSA distribution.
HSA Age 55 Catch Up Contribution
As in 401k and IRA contributions, you are allowed to contribute extra if you are above a certain age. If you are age 55 or older by the end of year, you can contribute additional $1,000 to your HSA. If you are married, and both of you are age 55, each of you can contribute additional $1,000.
What are the benefits of an HSA?
You may enjoy several benefits from having an HSA.
- 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.
- Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
- The contributions remain in your account until you use them.
- The interest or other earnings on the assets in the account are tax free.
- Distributions may be tax free if you pay qualified medical expenses. See Qualified medical expenses , later.
- An HSA is “portable.” It stays with you if you change employers or leave the work force.
Qualifying for an HSA
- You must be covered under a high deductible health plan (HDHP), described later, on the first day of the month.
- You have no other health coverage except what is permitted under Other health coverage , later.
- You are not enrolled in Medicare.
- You cannot be claimed as a dependent on someone else’s 2015 tax return.
Using HSA Funds in 2017
HSA’s aren’t “use it or lose it.” The money that you put in an HSA goes in tax-free. You can keep it, invest it, use it tax-free on medical expenses, withdraw funds from it at a fee, and roll it over into a retirement account when you are ready for Medicare. Only FSA’s, the kind of health savings account you get through your employer, are “use it or lose it.” Those under age 65 (unless totally and permanently disabled) who use HSA funds for nonqualified medical expenses face a penalty of 20 percent of the funds used for such expenses. Funds spent for nonqualified purposes are also subject to income tax.