Who Can Establish an HSA?
Any individual with a high deductible health insurance plan can establish an HSA. In 2015, you have to have an annual deductible of at least $1,300 for an individual or $2,600 for a family. Your plan must also limit your annual out of pocket expenses to $6,450 for individuals and $12,900 for families.
You cannot establish an HSA if you are entitled to or enrolled in Medicare, you can be claimed as a dependent on someone else’s tax return, or you are entitled to coverage under a plan that does not have a high deductible.
How Do You Open an HSA?
You can set up an account through any qualified trustee or custodian. That would include banks, insurance companies, or third-party administrators. Sometimes you can set up an HSA through the same company that provides your health insurance. You can set up this plan on your own, or you may want to go through your employer if they offer such services.
Who Can Contribute?
You, eligible family members, and your employer can make contributions to your HSA. It is important to note that you will no longer be able to contribute to your HSA after you retire.
How Much You Can Contribute?
In 2015 you can contribute up to $3,350 for an individual and $6,650 for a family. You can choose to make monthly contributions or a lump sum contribution before taxes are due. It is important to consult with a tax professional that can help you determine the amount of the HSA contribution you are entitled to. There are several factors that can play into that amount, including when you became eligible for the HSA plan.
Do Your Contributions Earn Interest?
You can choose to put your contributions in a savings or investment that is offered by your HSA custodian. This will allow you to generate interest or income that will grow tax deferred and can be withdrawn tax-free if they are used to pay for medical expenses.
How are HSAs Taxed?
- Contributions: As long as your contributions do not exceed the maximum limit, you can deduct them on your tax return. You do not have to itemize to deduct HSA contributions and you can even deduct contributions that family members make for you. Any employer contributions are excludable from your gross income.
- Distributions: Any money that you distribute to pay for qualified medical expenses for yourself, your spouse, or your dependents are tax exempt. Any distributions for nonqualified expenses are taxed as regular income and are also subject to an additional 20% penalty tax.
What Can You Do With Remaining HSA Funds?
- End of the Year: You can rollover any leftover funds at the end of the year. There is no limit to the length of time that you can keep your contributions in the account.
- Changing Jobs: You can take an HSA with you to another job and you can continue to make contributions as normal.
- Retirement: After you reach age 65 you can no longer make contributions, but you can still take tax-free distributions to pay for medical expenses. You can also take nonqualified distributions without the 20% penalty.
- Death: Any money left will be passed on to a beneficiary that you designate. If you name your spouse as the beneficiary they can become the account holder in your place. If the beneficiary is not a spouse, the fair market value of your account will be distributed.
There are many rules and limitations that apply to HSAs, especially when it comes to taxation. A Certified Financial Planner® can help you to make the correct choices when it comes to contributions and distributions.