10 HSA Tax Benefits You Must Know!

A health savings account (HSA) is a tax-advantaged savings account that can be used to pay for qualified medical expenses. An HSA holds your funds and accumulates fund tax freeI and pay for qualified medical expenses, like doctor visits, prescription drugs, etc. The list of HSA tax benefits in this post highlights how a health savings account (HSA) can significantly tackle a 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 Health Savings Accounts (HSA)?

There are different types of health savings accounts (HSAs) available to supplement health insurance coverage. Here are some of the types of HSAs:

1. HSA: This type of savings account lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in an HSA to pay for deductibles, copayments, coinsurance, and other expenses, you may be able to lower your overall healthcare costs. You can have two types of accounts -self-only HSAs and family HSAs. A self-only HSA is available to individuals with self-only HDHP coverage, while a family HSA is available to individuals with family HDHP coverage.
2. Health Reimbursement Arrangement (HRA) is a money fund your employer owns and contributes to in an account. HRAs are only available to employees who receive health care coverage from an employer.
3. Flexible Spending Account (FSA) which allows you to set aside money, on a pre-tax basis, for certain health care and dependent care expenses. There are three types of FSA accounts: Health Care FSA (HCFSA), Limited Expense Health Care FSA (LEX HCFSA), and Dependent Care FSA (DCFSA).

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.

• Be 18 years of age or older.
• Be covered under a qualified high-deductible health plan (HDHP) on the first day of a particular month.
• Have an annual deductible of at least $1,400 for self-only coverage and $2,800 for family coverage.
• Have an out-of-pocket maximum that does not exceed $7,050 for self-only coverage and $14,100 for family coverage.
• Not be claimed as a dependent on someone else’s tax return.
• Not be enrolled in Medicare.
• Not having other health coverage that is not an HDHP, with some exceptions such as dental, vision, and long-term care insurance.
• Not have received Veteran Affairs (A) medical benefits within the past three months.

10 HSA Tax benefits

The Internal Revenue Code (IRC) sections that pertain to HSAs are IRC 223, 106, and 105.

1. 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.
2. Employer contributions to an HSA are tax-free: The employer’s contributions to your HSA are not included in your taxable income.
3. 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.
4. 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.
5. Rollover 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 roll over to the following year. This means you can save up your HSA funds for future medical expenses.
6. Pay for long-term care insurance premiums: Use the HSA funds to pay for long-term care insurance premiums, subject to certain limits.
7. 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.
8. HSAs are portable: HSAs are owned by the individual, not the employer, so they can be taken with you if you change jobs.
9. 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 retirement savings vehicles. Funds in your HSA that are not used for medical costs can be saved and invested for retirement.
10. HSAs have high contribution limits: How much money can be contributed to an HSA each year is limited. The HSA contribution limits for the tax year 2023 are $3,850 for Individual plans and $ 8,300 for families. You can also claim extra savings of $1,000 if the participant is 55 years or older. This is often called HSA catch-up contributions. You can test our HSA contribution limit calculator to get an estimate on HSA contribution.

HDHP with HSA – super efficient way to tackle medical expenses.

Health Savings Account (HSA) is where you save money tax-free for health purposes. 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.So, under HDHP, you pay a small insurance premium, but your out-of-pocket medical expense is high. To tackle this, if you combine HSA, the accumulated money in HSA deals with those higher “out of pocket” medical expenses. Here’s how HDHP coverage with an HSA works:

1. 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 the amount you pay for your health care service costs until you reach the plan’s in-network deductible. 
2. 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.