A health savings account (HSA) is an individually owned tax-favored account that allows consumers to pay for qualified health care expenses.
An HSA must be coupled with a high-deductible health plan (HDHP) to receive the tax advantages allowed by the IRS. Premiums associated with an HDHP should be lower than a traditional plan, allowing employees to capture the savings to fund an HSA. Similar to a 401(k) savings plan, individuals can make tax-deductible contributions into an HSA and the account can earn interest tax-free. HSA funds can be used for any qualified out-of-pocket medical expense. The most common uses of an HSA are deductible payments and prescription drug expenses. Once the deductible is met, the health plan begins paying some or all covered expenses, depending on the plan selected.
Who is eligible to participate in an HSA?
In general, to be eligible for an HSA you must meet the following criteria:
- You must be covered under a qualified HDHP and not be covered under any other health plan.
- You cannot be enrolled in Medicare.
- You cannot be claimed as a dependent on someone else’s tax return.
Why choose an HSA?
There are a variety of compelling reasons to choose an HSA, including:
- The funds deposited into an HSA can reduce income taxes, similar to the money that is saved in a qualified retirement plan.
- By combining an HSA with a qualified HDHP, you can reduce your insurance premiums.
- Funds in the HSA grow tax-deferred and the account belongs to account holder for life.
- HSA funds can be withdrawn tax-free to pay for a variety of qualified medical expenses, many of which are not covered by traditional health insurance plans (including dental visits, prescription drugs, eyeglasses, contact lenses and chiropractor visits).
How much can I contribute to an HSA?
The U.S. Treasury Department establishes annual contribution limits and minimum deductible amounts for HSAs and HSA-qualified health plans, which are adjusted each year for inflation. The 2018 limits are as follows:
- The maximum annual HSA contribution for self-only HDHP coverage is $3,450.
- The maximum annual HSA contribution for family HDHP coverage is $6,900.
- Age 55 catch-up contributions will continue to be at $1,000.
- The minimum HDHP deductible is $1,350 for self-only coverage and $2,700 for family coverage.
- The annual maximum for HDHP out-of-pocket expenses (deductibles, co-payments and other amounts) is $6,650 for self-only coverage and $13,300 for family coverage.