The Internal Revenue Service (IRS) has released their updated numbers related to health savings accounts (HSAs). You’re eligible to open an HSA if you are a participant in a high-deductible health plan. The question is: how do you know if you have a high deductible health plan?
The Nuts and Bolts
The IRS defines HSAs as plans with deductibles of at least $1,400 for individual coverage and $2,800 for family coverage. Having an HSA is a way for you to save (and also invest) pre-tax money in an account that grows tax-deferred. That sounds like an IRA, doesn’t it? There are definitely some similarities. However, the main difference is that you can withdraw money from an HSA tax-free at any time, regardless of age, as long as you use it for qualified medical expenses.
What are qualified medical expenses? It’s actually a pretty long list that ranges from major surgery and doctor’s visits, to over-the-counter cold and flu medicine and more. Even things like insoles for your shoes and hand sanitizers can count as medical expenses.
Having the ability to save pre-tax money from a paycheck or through a tax deduction in order to squirrel away money for future medical expenses can be very helpful to some families. Individuals can currently save up to $3,600 per year in their health savings account.
If you have a family plan, it jumps up to $7,200. Beginning in 2022, the maximum individual contribution increases by $50 to $3,650 and the family maximum contribution jumps up $100 to $7,300.
You can take distributions to pay for a wide variety of medical expenses regardless of your age. The distributions are tax-free. However, if you take money out that isn’t for medical expenses, it is taxable as income. If you are under 65, the IRS can hit you with a 20% penalty. Those who are 65 or older cannot add to an HSA, but they CAN take distributions from one. If the distributions are for medical items, they are tax-free. If they aren’t, those distributions are taxable as income just like an IRA would be.
Remember, you can invest your HSA. This could be a way to save more money in a tax-deferred—possibly tax-free—account, if you’re already maxing out your retirement account contributions. The only catch is you have to have a high deductible plan, and the amount you can put in per-year must be lower than an IRA.
What Happens if You Die Before Using Your HSA?
You can leave your HSA to your spouse and they can use it just like you did. If you leave the HSA to anyone other than your spouse, the account is closed and then distributed to the beneficiary. They will have to pay income tax on the balance. The only exception is if they use the money within 12 months to pay YOUR medical expenses. If the funds are used to pay the original owner’s medical bills, they won’t be taxed. Many HSAs default to list your estate as your beneficiary. If that’s the case, then the account will distribute to your estate.
Any amount not used to pay your medical bills will be taxable as income to you on your final income tax return. If your beneficiary is in a higher tax bracket than you, then naming your estate might be the best course of action.
If you have questions regarding HSAs, please give us a call today. We would happy to help.