High-Deductible Health Plan and Health Savings Account
A great strategy available today is to combine a High-Deductible Health Plan (HDHP) with a Health Savings Account (HSA).
Online enrollment tool for individuals and other HSA resources Enroll HSA HSA Application Eligible Medical Expenses |
In order to determine if this strategy will work for you it’s essential that we “do the math”.
Here are some considerations:
HSA plans do not have up-front copays, so we must first determine how much your predictable medical expenses will be after the insurance company discount
On a High Deductible Health Plan, you get credit toward your calendar-year deductible for the amount you spend at the doctor’s office or pharmacy, another difference from a traditional copay plan.
If you have a High Deductible Health Plan, you can put aside money tax-free in a Health Savings Account, but the amount you will save in taxes depends not only on our income level but also on whether we’re contributing pre-tax dollars through payroll or sending our deposits directly to the financial institution and taking the deduction when we file our taxes.
That’s a lot of moving parts, and everyone’s situation is different. That’s where Insurance Lady comes in. We will make sure you understand the concept of Health Savings Accounts and help you understand the math to determine whether and HDHP/HSA combination is right for you.
What is an HSA
A Health Savings Account (HSA) is a tax-favored account used in conjunction with an HSA-compatible health plan. The HSA allows you to contribute funds on a pre-tax or tax-deductible basis, which you may use to pay for eligible medical expenses.
Contribution Limits and IRS requirements
The 2013 IRS contribution limits are:
| 2013 Inflation Adjusted Items | |||
| Calendar Year |
2013 |
2012 |
2011 |
| Maximum Annual Contribution Limit (Self-only) |
$3,250* |
$3,100* |
$3,050* |
| Maximum Annual Contribution Limit (Family) |
$6,450* |
$6,250* |
$6,150* |
| Catch-up Contribution Limit |
$1,000 |
$1,000 |
$1,000 |
| Minimum Annual Deductible (Self-only) |
$1,250 |
$1,200 |
$1,200 |
| Minimum Annual Deductible (Family) |
$2,500 |
$2,400 |
$2,400 |
| Maximum Out-of-pocket (Self-only) |
$6,250 |
$6,050 |
$5,950 |
| Maximum Out-of-pocket (Family) |
$12,500 |
$12,100 |
$11,900 |
| *An employee is treated as being eligible for the entire calendar year as long as he or she is eligible during the last month of the calendar year. However, failure to maintain eligibility during the “testing period” will result in adverse tax consequences (including an additional excise tax). The testing period begins in December of the year in which the employee becomes eligible and ends the last day of December of the following year. | |||
The full revenue procedure text is available on the IRS website.
IMPORTANT: In 2011, your Health Savings Account (HSA) may no longer be used for over-the-counter drugs, unless they are prescribed by your doctor.An eligible medical expense is an expense that pays for healthcare services, equipment or medications as described in IRS Publication 502.Eligible Medical Expenses
In general, your HSA can be used for:
- Expenses applied to your health plan deductible
- Dental care services
- Vision care services
- Prescription services
- Over-the-counter medications prescribed by your doctor
- Certain medical equipment
Tax Advantages
There are plenty of advantages to a Health Savings Account. Funds rollover each year, there’s no “use it or lose it’ and the account is FDIC insured. But the biggest advantage is the tax savings.
Contribution Tax Benefits
If your employer offers a payroll deduction through a Section 125 Cafeteria Plan, you can make contributions to your HSA on a pre-tax basis. The deduction is removed from your paycheck prior to taxes being applied and deposited into your HSA. Ask your employer if they facilitate pre-tax deductions.
Contributions can also be made post-tax as an “above-the-line” deduction. This means you can reduce your taxable income by the amount you contribute to your HSA. HSA Bank will send you all the documents you need to complete your HSA-related tax filing.
Distribution Tax Benefits
Eligible medical expenses such as prescriptions or dental and vision care can be purchased tax-free when you use your HSA. You can also pay out-of-pocket for eligible medical expenses and then reimburse yourself from your HSA.
Earnings Tax Benefits
The interest on HSA funds grows on a tax-deferred basis. And, unlike most savings accounts, interest earned on an HSA is not considered taxable income when the funds are used for eligible medical expenses.
When do you Pay Taxes on your HSA?
The only time you may pay taxes or penalties on your HSA funds is if you make a non-eligible purchase, or if you contribute more than the yearly maximum contribution limit. However, both misuses can be corrected free of tax penalties by April 15th of the following calendar year.
IRS Resources
HSAs were created in December 2003 with the passing of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Since then, the IRS has released additional guidance on HSA usage.
Click here for a list of HSA related IRS resources
