Health Savings Account (HSA) is a personal medical savings account for United States citizens who are enlisted in a high-deductible health plan (HDHP) and a salutary option for the tax payers.
Although there are no permissions required from Internal Revenue Service (IRS) to create an HSA (Health Savings Account), because of the tax advantages there are specific criteria you need to qualify on to create an Health Savings Account (HSA) and avail the tax benefits. Most exciting thing about HSA is, if you continue to contribute on it year on year without spending anything from the account, your money will be accumulated and by this way such a corpus capital can be generated that you can actually use this on your retirement planning.
Setting Up An Health Savings Account
Enrolling to an HSA is not at all difficult. It can be set up through a bank, credit unions, insurance companies or a licenced broker. You can create an HSA account with any qualified custodian. But it is very important that you choose well for an HSA provider, because HSA is more than only getting the tax advantages for your medical expenses, some HSA administrators even allow you for a long-term investment in mutual funds. The Investment options and the fees are different among different HSA providers, some account administrators will even force you to keep a minimum balance, so be wise to choose the HSA provider that fits your best interest and provides more supremacy to control your account.
Rules To Qualify For Health Savings Account
In order to start your contribution on HSA you must comply with all the below rules:
- You are covered under a high deductible health plan (HDHP), described later, on the first day of the month.
- You don’t have any additional health insurance coverage except what is permitted under other health coverage, later.
- You aren’t enrolled in Medicare.
- Nobody else can claim you as a dependent on their tax return.
Every individual who wants to open an HSA, should open a new and independent Health Savings Account, creation of joint account is not possible in this regard.
Contributions To An Health Savings Account
An eligible individual person can start contributing to the HSA which can be funded later by any other individual person or family member of the account owner. Either or both an employee and the employer can contribute to the employee owned HSA. Contribution to an HSA can be done monthly basis, you can also do a lump sum contribution at any point of time during a year, provided there is a certain maximum limit to the total yearly contribution for an HSA. This limit is generally revised every year and the maximum limit that can be contributed varies with your age and the policy you have subscribed to, like if you have the policy coverage only for you or your family too.
In 2020 the maximum limits for contribution to HSA is increasing by $50 resetting it to $3,550 for individual coverage, and $100 resetting it to $7,100 for family coverage, for an individual with age less than 55 years. For those over age 55 the catch-up contribution limit will remain at $1,000.
An eligible individual can finance his or her HSA only by cash, no stock or properties can be used to finance the HSA.
Health Savings Account and Medicare:
You will not be eligible to contribute on HSA if you are enrolled in Medicare part A or/and part B. Starting from the first month of your enrolment in Medicare your eligibility to contribute on HSA will become $0 per month. However, you can withdraw your saved amount from HSA at any point of time and use it. Moreover, you don’t have to pay any income tax on the amount withdrawn from the HSA if you use it for the qualified medical expenses.
IRS form 8889
Total contribution towards HSA can be claimed as a tax exemption by filling up IRS form 8889. Form 1040 or Form 1040NR should be combined with Form 8889 to file the tax return, in order to claim the deductions on the out-of-pocket contribution to HSA. You should also fill up Form 8889 in case money is withdrawn from HSA in that particular year.
Your HSA provider should send you Form 5498-SA articulating your whole HSA contribution for the year, and form 1099-SA providing all the withdrawal information of the year.
Key Benefits of an Health Savings Account
- You are eligible for a wide range of expenses including dental and mental health services apart from the qualified medical services.
- Any other individual apart from you can also contribute to your HSA, if your employer is contributing to your HSA the amount contributed can be excluded from your gross income and exempted from federal income taxes, thus provides you a big tax benefit.
- If used for the qualified medical services the amount withdrawn from an HSA is tax free.
- Any other earnings or gained interest amount on the accumulated HSA amount is considered free of tax as well.
- If you do not use the amount saved in HSA at the end of the year it will not expire and will be carry forwarded to the next year including the interest without reducing your contribution limits, thus a corpus asset can be built.
- HSA is a highly portable account, and does not depend on your current employment status, and thus provide convenience to expend the saved amount at any point of time for getting a qualified medical service not only for you but also for your spouse and your other tax dependents.
Withdrawal From An Health Savings Account:
Although withdrawal from an HSA is possible at any point of time, you should keep in mind that the withdrawn amount is spent only in the qualified medical services otherwise the amount withdrawn will be subjected to tax plus a 20% penalty will be imposed if your age is below or equals to 65. After the age of 65 only the tax will be taken into consideration not the penalty, in such cases.