Health Savings Accounts (HSAs) are a tax efficient way to pay for health care.
To establish a HSA you need to be eligible. Taxpayers are eligible if:
- They are not on Medicare and;
- They are enrolled in a High Deductible Health Plan (HDHP)
For 2021, a High Deductible Health Plan is one where the minimum deductible is $1,400 for a single individual and $2,800 for a family. Additionally, the maximum Out-of- Pocket limits (deductibles, co-payments and other amounts, but not premiums) is $7,000 for a single individual and $14,000 for a family.
1. HSA contributions are tax deductible:
For 2021, a single individual can contribute up to $3,600 and a family can contribute up to $7,200. Additionally, taxpayers age 55 and older can make a so-called “Catch-Up contribution” annually of $1,000.
This deduction is a “Above-the-line Deduction” and therefore is allowed in calculating Adjusted Gross Income (AGI). The additional benefit is that this deduction is also deductible for State of Connecticut income tax as AGI is the starting point for the tax calculation.
Contributions have the same due date as IRA’s. A 2020 HSA contribution needs to be funded by May 17, 2021. The 2020 limits are $3,550 for a single individual and $7,100 for a family.
2. If funds in the HSA are invested, any growth (may be) tax-free.
HSA administrator will offer investment options for HSA accounts. These tend to be mutual funds. Qualifying distributions will be tax-free. Non-qualifying distributions will be tax-deferred.
3. Withdrawals to pay qualified medical expenses are tax-free.
Caution needs to be exercised when taking withdraws to pay for medical expenses, however, as non-qualified distributions are not tax-free. Additionally, in addition to the income tax, there is a 20% penalty if the distribution is made before age 65.
For folks that have resources to pay for medical expenses from another source, they should consider using those funds to pay their medical expenses. This would allow their HSA to grow over time. If you are in a position to do this, maintain the receipts for these medical bills. You can reimburse yourself at some point in the future. Any expense that was incurred after the establishment of the HSA can be reimbursed.
Tom Scanlon, CPA, CFP® has over thirty-five years experience in public accounting with an extensive background in the areas of financial, tax and estate planning.
