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 you incur. You must be an eligible individual to qualify and the account can be established through a qualified HSA trustee. A qualified HSA trustee can be a bank, insurance company or anyone already approved by the IRS to be a trustee of individual retirement arrangements.
Although HSA accounts are intended to cover healthcare expenses, you may be surprised by the many different ways that you can utilize the funds in an HSA account. However, there are eligibility and contribution limits for HSA accounts. (For more, see: Pros and Cons of a Health Savings Account.)
Who Is Eligible?
To be an eligible individual and qualify for an HSA, you must meet the following requirements:
- Covered under a high deductible-health plan (HDHP).
- Have no other health coverage. There are exceptions. Discuss with your CPA.
- Not enrolled in Medicare.
- Can’t be claimed as a dependent on someone else's 2018 tax return.
The amount you can contribute to your HSA depends on the type of HDHP coverage you have, your age, the date you become an eligible individual and the date you cease to be eligible. For 2018, if you have self-only HDHP coverage, you can contribute up to $3,450. If you have family HDHP coverage, you can contribute up to $6,850. Add $1,000 to these numbers if you are over age 55.
Current and Future Uses
If you already have an HSA, you are probably aware that the type of medical expenses that you are permitted to reimburse yourself for through your HSA are those that would generally qualify for the medical and dental expense deductions. IRS Publication 502, Medical and Dental Expenses provides detail.
However, the money that you accumulate in your HSA can be strategically earmarked for other expenses that you may not be aware of including:
- Long-term care insurance premiums and expenses. The premiums you are eligible to treat as qualified medical expenses are subject to limits so check with your CPA.
- Monthly premiums for Medicare. Once you reach 65, you can use HSA contributions for Medicare Parts A, B or D premiums. For high income earners during retirement, your premiums are increased and this can be a big help. However, the amount in an HSA account cannot be used for Medigap monthly premiums.
- Healthcare continuation coverage such as COBRA. At age 65, you can use your HSA to pay for other healthcare premiums including employment-based retiree benefit programs - not just yours, but your spouse or dependents as well.
- Healthcare coverage while receiving unemployment compensation under federal or state law.
An added benefit of HSA accounts is that once you reach the age of 65, you can access the money for non-medical expenses, too. At this time you will face no penalty for withdrawals and will simply be subject to standard income tax.
The Bottom Line
If you have a high deductible health plan, don’t miss out on these great ways to prepare for future expenses. (For more from this author, see: Long-Term Care Insurance: What to Consider.)
Disclaimer: Investing involves risk and may lose value. Rebalancing may involve transaction costs and does not assure a profit or protect against a loss. Rebalancing non-retirement accounts may incur a tax liability.