Health Savings Accounts (HSA) Update
Health Savings Accounts or HSAs, subject to eligibility, represent the most attractive tax advantaged type of account.
That’s because contributions will reduce taxable income, withdrawals for qualifying medical expenses are tax free (as opposed to tax deferred) and, as a result, investment returns are also not taxed. There’s no use it or lose it provision, so it can make sense to allow money to accumulate in the account and pay medical expenses from other sources until some future date. Driving that advice is the fact that some HSA custodians and platforms have become much more investor friendly; the websites have emerged from the dark ages, and fund choices now include low cost fund options.
Kiplinger Tax Letter – Nov 15, 2019
Health insurance is on many readers’ minds… As they are reviewing their options for 2020. Whether enrolling in coverage through your workplace or buying a plan on your own, there’s lots to consider. One choice may be a health savings account.
HSAs are tax-advantaged arrangements that can be used to manage your health deductibles and out-of-pocket costs and also allow you to save for future health care expenses. Many employers have an HSA option available for their employees. If your employer doesn’t offer it, check with your bank or brokerage firm about whether you can fund an HSA for yourself or your family.
Eligibility for HSAs is restricted. You must have a high-deductible health plan to qualify. The minimum allowable deductible for 2020 is $2,800 for family coverage and $1,400 for self-only coverage. And out-of-pocket costs, including copayments, can’t exceed $6,900 a year for individual coverage and $13,800 for family coverage.
Expenses for preventive care can be covered dollar for dollar by HDHPs, even if the deductible hasn’t been met. Alternatively, preventive medical costs can be covered by a lower deductible, depending on the terms of the insurance policy. This past summer, IRS relaxed the rules for people with certain chronic illnesses. Some services and drugs for a range of chronic conditions are treated as preventive care that can be covered by HDHPs, including blood pressure monitors for hypertension, statins for heart disease, and selective serotonin reuptake inhibitors for depression.
People enrolled in Medicare can’t contribute to HSAs. But don’t despair if you have a balance in an existing HSA. Once you turn 65, you can use HSA money on a tax-free basis to pay monthly Medicare premiums, or even long-term care premiums. And while you’re on Medicare, you can continue to take tax-free payouts from your HSA for out-of-pocket medicals.
HSAs have several major federal tax advantages that owners can enjoy. Contributions to HSAs are deductible or are from pretax wages, up to a limit. For 2020, the annual cap on contributions to HSAs is $3,550 for self-only coverage and $7,100 for family coverage. People born before 1966 can put in $1,000 more. Excess payins aren’t deductible and are hit with a 6% yearly excise tax until withdrawn.
Earnings inside an HSA build up tax-free for the account owner. HSAs don’t have a use-it-or-lose-it rule, unlike health flexible spending accounts.
And any withdrawals that are used to pay medical expenses are not taxed. Distributions from HSAs for other purposes are taxed and subject to a 20% penalty. The fine doesn’t apply to account owners who are age 65 or older, disabled or deceased. After 65 HSA distributions are never subject to penalty, no matter the expense. For that reason, it usually makes the most sense to name your spouse as beneficiary. If anyone other than a spouse inherits an HSA the money must be disbursed and it is taxable, although there is no penalty. Here’s some good information on HSAs for people over 65.
We’re keeping an eye on three HSA proposals in Congress’s lower chamber: Allowing HSAs to reimburse the cost of menstrual products and over-the-counter drugs. Letting HDHPs cover the cost of inhalers with no deductible. And permitting individuals with subscriptions for access to primary care to remain eligible to fund an HSA. These bills were approved by the House Ways & Means Com. on a bipartisan basis.