Understanding Health Savings Accounts
Health savings accounts (HSAs) medical savings accounts available for those with qualifying high-deductible health plans (HDHPs) are enjoying widespread use. However, HSAs operate under a number of technical rules, so here is a brief overview.
What Is an HDHP?
HSAs are available only to those with qualifying HDHPs. For both 2016 and 2017, a qualifying HDHP has an annual deductible of at least $1,300 for individual coverage or $2,600 for family coverage. (An HDHP may, however, have a lower deductible for preventive care.) Additionally, the sum of the annual deductible and other out-of-pocket expenses (other than premiums) for covered benefits may not exceed $6,550 for individual coverage and $13,100 for family coverage.
Note that employers may offer an HSA option along with an HDHP, or an eligible individual with an HDHP may choose to open an HSA at a financial institution or other provider. Therefore, self-employed individuals participating in a qualified HDHP may take advantage of an HSA.
Is Additional Coverage Allowed?
To qualify for an HSA, an individual (and the individual's spouse, with family coverage) generally may not have health coverage that is not an HDHP. However, there are exceptions. For example, additional coverage for accidents, disability, dental care, vision care, and long-term care is allowed.
Are HSA Contributions Tax Deductible?
HSA contributions are tax deductible, within certain limits. Similarly, any employer contributions to an employee's HSA are not included in the employee's income (up to the deduction limitation).
For 2017, the maximum deductible HSA contribution is $3,400 for a person with self-only coverage under an HDHP (increased from $3,350 in 2016) and $6,750 for a person with family coverage (unchanged from 2016). Individuals age 55 and older may make additional "catch-up" contributions to their HSA of up to $1,000 per year. However, no contributions (nor any deductions) may be made for any month an individual is eligible for and enrolled in Medicare.
HSA contributions are taken as an "above-the-line" deduction, meaning that they reduce adjusted gross income and may therefore help the taxpayer qualify for certain other tax benefits. A taxpayer does not have to itemize to claim the deduction for HSA contributions any deduction is in addition to the taxpayer's standard deduction or allowable itemized deductions.
How Are Account Earnings Taxed?
Many custodians of HSAs offer various investment options for contributions. Any interest or other investment income earned on the contributions is not taxed while the earnings remain in the account. Moreover, tax law does not require the HSA owner to take money out of an HSA each year, so funds can be left to accumulate if they are not needed for medical expenses.
Are Distributions Taxable?
No tax is due on funds withdrawn from an HSA as long as the money is used to pay qualified medical expenses for the account holder or his or her spouse and dependents. Generally, medical expenses that are allowed for the itemized medical expense deduction are qualified medical expenses for HSA purposes.
Qualified medical expenses do not include most health insurance premiums Exceptions include premiums for quali fled long-term care insurance and --for individuals over age 65 - medicare pre miums. However, premiums for supple mental Medicare policies ("Medigap") are not qualified medical expenses.
Withdrawals not used for qualified medical expenses are taxable and an additional 20% penalty generally would apply to withdrawals before the individual attains age 65, dies, or becomes disabled.
15 Partnerships and S corporations: File 2016 calendar-year partnership return (Form 1065) or S corporation return (Form 11 20S(. For an automatic six-month extension, file Form 7004.
18 Individuals: Most calendar-year taxpayers file 2016 income tax return (Form 1040, 1040A, or 1040EZ) with the IRS. For an automatic six-month extension, file Form 4868 and pay the estimated tax due.
18 Individuals: Pay the first installment of 2017 estimated tax.
18 Corporations: Calendar-year corporations file 2016 tax return (Form 1 1 20( and pay any tax due. For an automatic five-month filing extension, file Form 7004 and deposit the estimated tax due.
18 Corporations: Deposit first installment of 2017 estimated tax.
1 Employers: File Form 941, Employer's Quarterly Federal Tax Return; quarterly deposit due for those who meet the safe harbor requirements.
10 Employers: Deferred due date for Form 941, if timely deposits were made.
15 Exempt organizations: File 2016 Form 990, 990-EZ, or 990-N, if the orga nization reports on a calendar-year basis.