The list of HSA tax benefits highlights how a health savings account (HSA) can play great role to tackle health emergency that requires huge medical expenditure. The Medicare Prescription Drug, Improvement, and Modernization Act passed by Congress in 2003 , regulates the health savings account . HSAs are available to individuals who are enrolled in a high-deductible health plan (HDHP) and are not covered by other health insurance plans, including Medicare.
What are the types of HSA accounts?
There are two types of HSAs: self-only HSAs and family HSAs. A self-only HSA is available to individuals who have self-only HDHP coverage, while a family HSA is available to individuals who have family HDHP coverage.A High Deductible Health Plan (HDHP) is a type of health insurance plan that has a high annual deductible, which is the amount you must pay out-of-pocket before your insurance begins to pay for covered medical expenses.
How HDHP works ?
HDHPs are often paired with a Health Savings Account (HSA), which is a tax-advantaged account that you can use to pay for qualifying medical expenses.Here’s how HDHP coverage with an HSA works:
- You enroll in an HDHP and open an HSA: To be eligible for an HSA, you must be enrolled in an HDHP. You can open an HSA at a bank, credit union, or other financial institution.
- You contribute to your HSA: You or your employer can contribute to your HSA. Contributions to your HSA are tax-deductible and the funds in the account grow tax-free.
- You pay your deductible: If you have an HDHP, you are responsible for paying your deductible before your insurance begins to pay for covered medical expenses. The deductible is an annual amount, so you will need to pay it each year before your insurance kicks in.
- You pay for qualifying medical expenses: If you have an HDHP, you are responsible for paying for most of your medical expenses out-of-pocket until you reach your deductible. You can use the funds in your HSA to pay for qualifying medical expenses, such as doctor’s visits, prescription drugs, and other covered services.
- Your insurance begins to pay for covered medical expenses: Once you have paid your deductible, your HDHP will begin to pay for covered medical expenses. The amount your insurance pays will depend on your policy and the type of service you are receiving.
Who is eligible to contribute to an HSA account?
Under the Internal Revenue Code (IRC), the following are rules for being eligible to contribute to an HSA.
- Enrollment in an HDHP: In order to be eligible to contribute to an HSA, an individual must be enrolled in a high-deductible health plan (HDHP). The HDHP must meet certain requirements in terms of the minimum deductible and maximum out-of-pocket expenses.
- No other coverage: An individual must not be covered by any other health insurance plan, including Medicare, in order to be eligible to contribute to an HSA. This means that an individual cannot have coverage under a traditional health insurance plan or any other type of insurance that provides coverage for medical expenses.
- Not claimed as a dependent: An individual cannot be claimed as a dependent on someone else’s tax return in order to be eligible to contribute to an HSA.
By meeting these requirements, an individual can be eligible to contribute to an HSA and take advantage of the tax benefits and the ability to pay for qualified medical expenses on a tax-free basis. It is important for individuals to understand these requirements in order to determine their eligibility to contribute to an HSA.
10 HSA Tax benefits
The Internal Revenue Code (IRC) sections that pertain to HSAs are IRC 223, 106, and 105.
- Contributions to an HSA are tax-deductible: Contributions to an HSA are tax-deductible, even if you do not itemize your deductions on your tax return.In other words,you can deduct the amount you contribute to your HSA from your taxable income, reducing the amount of tax you owe.
- Employer contributions to an HSA are tax-free: The employer’s contributes to your HSA are not included in your taxable income.
- Investment income earned in an HSA is tax-free: Any interest, dividends, or capital gains earned on the funds in your HSA are tax-free.
- Withdrawals for qualifying medical expenses are tax-free: If you use the funds in your HSA to pay for qualifying medical expenses, those withdrawals are tax-free. Qualifying medical expenses are those expenses that would be eligible for the medical and dental expenses deduction on your tax return.
- Roll over of HSA funds from year to year: Unlike Flexible Spending Accounts (FSAs), which have a “use it or lose it” rule, any funds remaining in your HSA rolls over to the following year. This means you can save up funds in your HSA to use for future medical expenses.
- Pay for long-term care insurance premiums: Use the HSA funds to pay for long-term care insurance premiums, subject to certain limits.
- HSAs can be used to pay for Medicare premiums: You can use the funds in your HSA to pay for Medicare premiums, subject to certain limits.
- HSAs are portable: HSAs are owned by the individual, not the employer, so they can be taken with you if you change jobs.
- HSAs can be used to save for retirement: While HSAs are primarily designed to pay for current medical expenses, they can also be used as a retirement savings vehicle. Funds in your HSA that are not used for medical expenses can be saved and invested for use in retirement.
- HSAs have high contribution limits: There are limits on the amount of money that can be contributed to an HSA each year. The HSA contribution limits for the tax year 2022 are $3,650 for Individual plan and $ 7,300 for family. You can also claim extra savings of $1,000 if the age of the participant is 55 years or more .This is often called as HSA catch-up contributions. You can test our HSA contribution limit calculator to get an estimate on HSA contribution.
While the information on this site - Internal Revenue Code Simplified-is about legal issues, it is not legal advice or legal representation. Because of the rapidly changing nature of the law and our reliance upon outside sources, we make no warranty or guarantee of the accuracy or reliability of information contained herein.