Unexpected medical costs without proper savings–including health insurance deductibles themselves, which have even gone up in recent years–can really leave you in a bind. One of the ways you can ensure you’re better prepared is with a health savings account (HSA).
An HSA is a special type of savings account that allows you to put funds aside for medical expenses. One of the advantages of an HSA are the tax advantages it provides, which can help offset the high cost of healthcare costs.
Learn more about HSAs and determine whether you might want to enroll in one.
What is a health savings account (HSA)?
A health savings account, otherwise known as an HSA, is a type of long-term personal savings account. It is geared towards helping you pay certain eligible health care costs while helping to alleviate some of the stress of unexpected medical bills.
An HSA allows you the flexibility of putting money away, tax-free, but you must use the funds for qualified medical expenses such as deductibles, copayments, coinsurance, and medications.
Typically, HSAs are offered as part of your benefits package from your employer, but you may also be able to open an HSA plan on your own if your health plan is eligible.
How does an HSA account work?
A health savings account (HSA) allows you to save money for future qualified health expenses on a tax-free basis.
You set up the HSA account with an approved institution. You then contribute to the plan annually on a tax-free basis through your employer. You can also contribute on your own if you don’t have a plan through your employer.
Are HSA contributions tax deductible? Yes, you’ll receive a tax deduction on Schedule 1, Part II, Line 13, which then flows into Form 1040, line 10 as an adjustment to your income.
As you need the funds to pay medical expenses, you can receive distributions from the account. As long as the distributions are used to pay medical expenses, there is no tax effect.
The beauty of the plan is that you get the tax benefit up-front when you contribute to the plan. Any unused funds carry over from year-to-year until you need them.
If you don’t have your HSA with your employer, you can set up an HSA with a financial institution, insurance company, or another approved provider.
How is an HSA different from an FSA?
While both an HSA account and a flexible spending arrangement (FSA) are used for medical expenses and reduce your taxable income, the IRS restrictions governing these accounts differ significantly resulting in a major difference between an FSA vs. HSA.
A flexible spending arrangement, often referred to as a flexible spending account, or FSA, is a type of savings account set up by an employer that lets you save and set aside money on a pre-tax basis to pay for qualified, out-of-pocket, medical expenses.
With an HSA, unspent funds can remain in your account for years and even roll over into a new account. In many cases, FSA funds must be spent by the end of the year; otherwise, you forfeit your money. If your plan does allow you to roll over, there’s a limit to how much you can carry over. An FSA plan can also provide for a grace period to use the remaining funds of up to 2 ½ months after the end of the year, but it does depend upon the plan.
What types of expenses are eligible for an HSA
If you use your HSA funds for ineligible expenses, you could be subject to a 20% penalty and income tax. To avoid this, make sure to only use your HSA funds on qualified medical expenses such as:
- Copayments
- Deductibles
- Qualified dental and vision expenses
- Medication costs
If you have any questions about additional medical supplies, review your plan’s terms.
Benefits of an HSA
- You can claim a deduction for contributions you make that are not pre-tax or made by your employer, even if you don’t itemize your deductions on Schedule A.
- Contributions made on your behalf by your employer, including any pre-tax contributions you make through a cafeteria plan, are generally not taxable.
- Unused contributions remain in your account from year to year.
- Interest earned on the account is usually tax-free.
- Distributions used to pay for qualified medical expenses are tax-free.
- Your account stays with you even if you leave your employer.
Potential cons of an HSA
While there are a lot of pros to opening an HSA account, it’s important to weigh out the cons and ensure it is the right move for you to make financially.
The potential cons of contributing to an HSA include:
- You must have a high-deductible health plan (HDHP), which can create a higher financial strain compared to other health insurance plans.
- Taxes and penalties for non-qualified costs result in income tax owed and a 20% penalty fee.
- The need for meticulous record keeping of receipts to prove withdrawals from HSA were used for qualified health expenses.
- Some HSAs charge monthly fees for maintenance or a fee per transaction.
Qualifying for an HSA
You must have an HDHP. An HDHP has a higher deductible than most health plans and a maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you pay.
You can set up a self-only (one person) or a family (more than one person) coverage plan.
For 2023, the limits are as follows for self-only and family coverage plans:
| Minimum Annual Deductible | Maximum Annual Deductible Plus Out-of-Pocket Expenses | |
| Self | $1,500 | $7,500 |
| Family | $3,000 | $15,000 |
For 2024, the limits are as follows for self-only and family coverage plans:
| Minimum Annual Deductible | Maximum Annual Deductible Plus Out-of-Pocket Expenses | |
| Self | $1,600 | $8,050 |
| Family | $3,200 | $16,100 |
- You generally can’t be covered under another insurance plan.
- You can’t be enrolled in Medicare.
- You can’t be a dependent on someone else’s return.
Can you qualify for an HSA if you’re self-employed?
As we mentioned above, even if you are self-employed, if your healthcare plan is eligible, you may be able to apply for an HSA Account. To qualify, you must meet the following requirements:
- You are covered by an HDHP.
- You have no other health coverage except your HDHP.
- You aren’t enrolled in Medicare.
- You’re not claimed as a dependent on anyone else’s tax return.
Contributions
- As we discussed earlier, contributions to your HSA can be made by you, your employer, or both.
- Pre-tax contributions made by you through a cafeteria plan or by your employer are both considered employer contributions, and are reported on Form W-2, line 12, code W.
- You can also make contributions to your account on your own – these contributions usually result in an HSA deduction Schedule 1, Part II, Line 13, which then flows into Form 1040, line 10.
- You can contribute up to your annual plan deductible amount each year if you had the account all year. The limits are detailed in the table above. If you have a self-coverage plan, you can contribute up to $3,850 annually for 2023 and $4,150 for 2024; if you have a family coverage plan, you can contribute up to $7,750 annually for 2023, and $8,300 for 2024.
- The deductible amount must be allocated based on the number of months you held the account if you didn’t have it the entire year.
- If you are 55 years or older, your contribution limit increases by $1,000 in 2024.
- Any contributions over the deductible limit are considered excess contributions and are not deductible.
- Excess contributions made by your employer or made by you through a cafeteria plan are taxable income and may be subject to a 6% excise tax.
- An excess contribution can be withdrawn by the due date of the return, including extensions, to avoid the additional tax.
Multiple coverage situations
- This is where it can get dicey!! As discussed earlier, you can have a plan with self coverage or family coverage. However, if you and your spouse are filing jointly and either of you have a family coverage plan, you are both considered to have the family coverage plan (even if one of you has a self-only plan).
- If both you and your spouse have family coverage plans at the same time, you are both considered to have the family coverage plan with the lowest deductible. You and your spouse would both complete a Form 8889, and the deductible limit must be allocated between the two of you as you choose.
Distributions
- A distribution is money that you receive from your HSA to pay qualified medical expenses during the year.
- These distributions will be reported to you on Form 1099-SA at the end of the year.
- If the distributions are used for a purpose other than to pay qualified medical expenses, the amount will be taxable income and also may be subject to an additional 10% tax.
How do HSA rollovers work?
One of the biggest benefits of having an HSA is that it’s portable. This means you can carry them with you if you leave one company for another or change your healthcare plan through HSA rollovers. By rolling over an HSA, you can help centralize your health savings, gain access to investments that align with your needs and goals, and even minimize fees.
The simplest way to start the rollover process is by contacting your current HSA provider, informing them you intend to close the account and move your HSA to another provider. They will then either:
- Directly transfer your funds and investments to your new provider.
- Ask to sell off your investments and transfer the cash only to your new provider.
- Ask to sell off your investments and then send a check or electronic transfer with your HSA funds directly for you to deposit into your new HSA account.
Be sure you transfer the funds within 60 days to avoid any taxable withdrawals or an additional 20% penalty. As you can see, HSAs can be a little complicated, but they can also provide a great tax break to certain taxpayers.
TurboTax can help you wade through some of the complications. All you have to do is answer the questions in TurboTax related to HSAs, and it will calculate your deduction, if applicable, and accurately report your HSA activity for the year.
For additional information on HSAs:
IRS Publication 969
No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.
