A Health Savings Account (HSA) is a tax-exempt trust or custodial account that you set up with a qualified HSA trustee to pay or reimburse certain medical expenses that you incur. For 2019, the IRS has set the maximum contribution amounts at $3,500 for individuals and $7,000 for families. If you are age 55 or older, a “catch up” contribution of $1,000 can be added as well.
Are You Eligible for an HSA?
First, let’s consider who might be eligible to make HSA contributions. To do this, there are two questions that need answering:
1. Are you currently enrolled in a High Deductible Health Plan (HDHP) and not enrolled in Medicare or included on a spouse’s plan that lacks high deductibles?
2. Are you an independent tax filer?
If you answered yes to the above two questions, you may be eligible to make contributions to an HSA account.
Possible Advantages of Having an HSA
One of the advantages of funding an HSA account is that contributions are typically pre-tax dollars, which means that they may not be subject to federal or state income taxes. Those dollars are then allowed to grow tax-free. In addition, as long as you are using the funds in your HSA to pay qualified medical expenses, withdrawals may be tax-free.
Two additional advantages of HSAs are that:
- HSA account funds don’t have to be used up by the end of the year.
- Most HSA plans are fairly convenient to use.
Personally, my husband and I fully fund an HSA account each year through payroll deductions. We each carry a debit card for the account, which makes paying qualified medical expenses very convenient.
Possible Disadvantages of Having an HSA
One disadvantage of HSA accounts is the High-Deductible Health Plan requirement. If you are a person with greater healthcare needs, a HDHP may not be the best choice for your personal situation, thereby making you ineligible for HSA contributions.
Other disadvantages could include:
- HSA maintenance and/or per-transaction fees.
- Maintaining records/receipts to prove, if needed, how the HSA funds were utilized.
- Taxes owed (plus penalties unless the account holder is disabled, reaches age 65, or dies) if you choose to use the HSA funds for non-qualified expenses.
Please keep in mind that the IRS has rules for what is considered a qualified medical expense. For example, you won’t be able to use HSA funds to pay healthcare premiums unless you plan to use it for one of the following:
1. Long-term care insurance (there are limits to this).
2. Health care continuation coverage (for example: COBRA).
3. Health care coverage while receiving unemployment compensation.
4. Medicare and other health care coverage if you are 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).
Please consult with a financial professional if you have any questions or are wondering if an HSA may be right for you.