The traditional adage about Americans hating death and taxes might be slightly amended to hating health-care costs and taxes. After all, the U.S. per-capita expenditure for healthcare is more than $9,500, and healthcare accounts for about 18% of America’s GDP--or more than 1 out of every 6 dollars spent in the American economy. Meanwhile, Americans paid a record $1.76 trillion in income taxes in 2015.
Fortunately, there’s a financial vehicle, known as the Health Savings Account or HSA, that helps reduce health-care costs by shielding from tax money you use to pay medical bills. The accounts are not available to any healthcare consumer, though, only those that have what’s known as High-Deductible Health Plans (HDHPs). (For 2017, these are plans whose minimum deductible is $1,300 for an individual and $2,600 for a family.)
What an HSA Is, And How It Works
An HSA works much like other savings accounts, in that you put in money, it earns interest, and you withdraw the funds when you need them. Once the account is open, you can request a debit card (or in some cases checks) that you then use to pay for qualified medical expenses such as prescription drugs and prescribed medical tests. Some items such as over-the-counter medicine do not fit the IRS definition of qualified medical expenses,. Make sure, then, that you get clear, updated information on how you can use your money without penalty.
The law permits employees and employers to contribute to HSAs provided they follow certain rules. The IRS raised the annual contribution limit for individuals with self-only coverage to $3,400 in 2017 while the contribution limit stayed at $6,750 for someone with a family HDHP. Like other tax-advantaged accounts, HSAs allow for “catch up” contributions. HSA account holders 55 and older can set aside an extra $1,000 per year.
HSAs offer a variety of tax benefits. You can deduct your contributions from your taxes. If your employer contributes money to your HSA, the IRS notes that the contribution may be excluded from your gross income. In other words, an employer’s contribution of $1,000 does not add $1,000 to your gross income--and the interest you earn from such an account is also tax-free. When you use your money for qualified medical expenses, the distributions are tax-free.
There are tax benefits to businesses too. An employer can deduct HSA contributions on its business income tax return. If you own a business or work in Human Resources, HSA contributions combined with an HDHP might well save your company on healthcare costs.
Take it With You, Help When You’re Hurting
HSAs are portable. If you leave your job or retire, you take the HSA with you. You can roll over any unused funds year to year. That means if you have $500 in your HSA in December, you do not have to schedule any doctor’s appointments to use up the money. Unused funds do not count towards the maximum contribution in the new year so you can build a nest egg geared specifically to address healthcare savings.
While you usually cannot use HSA funds to pay premiums, there are important exceptions. You can use HSA money to pay COBRA health continuation coverage if you lose your job. It is also legal to pay for long-term care insurance with your HSA.
Once you enroll in Medicare, you can no longer contribute to an HSA. You keep the accumulated funds. You can use your HSA to pay for a Medicare supplemental policy or other costs not covered by Medicare. Your spouse inherits an HSA if you designate him or her as the beneficiary. That gives you peace of mind that your spouse has resources to take care of the often steep medical bills related to age.