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Making the Most of Your HSA

by TFM Staff

Health savings accounts (HSAs) are still a great way for many people to save money on their health insurance costs, income taxes, or both. They combine high deductible health insurance with a tax-favored savings account.

Chances are, you and your family may be enrolled in a high deductible health plan, or HDHP, this year. Due to the Affordable Care Act many companies have opted to offer HDHPs in place of traditional and “Cadillac”-style plans to avoid penalties expected to fully go into effect in 2018. Your HDHP comes with added value to you as a consumer in a number of aspects, including a lower premium, maximum out-of-pocket expenses and the opportunity to participate in an HSA, or health savings account.

We sat down with CPA Dan W. Holloway to discuss HSAs and the many tax advantages associated with them.

What is an HSA?

Health savings accounts are a great way for people to save money on their health insurance costs, income taxes, or both. The savings account is tax-favored, contributions to and distributions from receive favorable income tax treatment, and the funds in an HSA are not subject to federal income tax. Individuals under 65 who are covered by a qualified HDHP (and no other ineligible health plan) can enroll in an HSA. Eligible individuals can make contributions on their own or as an option under a cafeteria plan.

How are contributions to an HSA taxed?

Contributions are deductible, within limits, when figuring your adjusted gross income (AGI) for federal income tax purposes. Any employer contributions are also excluded from AGI within the same limits. Earnings on amounts in an HSA are not currently taxable, nor are distributions from an HSA that are used to pay for qualified medical expenses.

What are the limits on deductibility of HSA contributions?

In 2016, the maximum annual contribution to an HSA is $3,350 for an eligible individual with self-only coverage, and $6,750 for an eligible individual with family coverage. If you are 55 or older your annual contribution limit is increased by $1,000. You can make contributions to your HSA up until your tax filing due date.

How are distributions from an HSA taxed?

Distributions from an HSA to pay the medical expenses of the individual and his or her spouse or dependents is excludable from income. Distributions that are not used to pay medical expenses are subject to income tax and also are subject to an additional 20 percent penalty tax unless the distribution is made after age 65 or on account of death or disability.

How do I decide if an HSA is right for me?

The concept that most people miss is that with the HDHP your premium savings compared to a normal fully insured plan should be enough to fund the HSA to cover the high deductible amount. So, if you pay the balance of what you would have paid under the normal plan into the savings account, you will have enough to cover the deductible should you incur health costs. If your health costs for the year are less than the deductible, you get to keep the extra amount in your savings account. And remember, the HSA contribution is tax deductible. Also, the high-deductible plan usually covers 100 percent of expenses above the deductible amount with no co-pays.

Dan Holloway is a CPA and business advisor and a partner with Sanders, Holloway & Ryan.

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