Many employers are encouraging increased use of Health Savings Accounts (HSAs). Employers should understand HSAs to be able to explain them to their employees.
A health savings account is an IRA-like, tax-exempt trust or custodial account that can be used to pay for certain medical expenses of the HSA holder, the holder’s spouse and/or tax dependents. An HSA can only be established by a qualified individual: someone who is covered under a high deductible health plan on the first day of the month; someone who has no other health coverage (except certain limited coverage); someone who is not enrolled in Medicare; and someone who cannot be claimed as a dependent on a tax return.
HSAs are individual accounts. The HSA is created through a banking institution. Sometimes the HSA is created directly by the employee, and other times the employer facilitates the implementation of the HSA.
Contributions to an HSA are tax-free. They may be made in cash and can be made by anyone on behalf of the eligible individual. Contributions are limited each year. For 2017, the contribution is $3,400 for an individual who has self-only HDHP coverage and $6,750 for an individual with family HDHP coverage. HSA holders age 55 and older may contribute an extra $1,000. Contributions are deductible from gross income.
Withdrawals from an HSA to pay qualified medical expenses are tax-free. A qualified medical expense is an expense for medical care as described in Section 213(d) of the Internal Revenue Code. To be a qualified medical expense, the expense must be incurred to diagnose, cure, mitigate, treat or prevent disease, or to affect any structure or function of the body.
HSA holders may withdraw amounts for non-medical expenses, but those amounts will be subject to tax and a 20% penalty. There is no penalty assessed on a non-medical expense withdrawal if the account holder is 65 or older, but the tax is still imposed.
HSA money is not forfeited- the account is portable and stays with the employee if he leaves the workforce or transfers to a different employer. The HSA is owned by the account holder and continues to grow tax deferred. HSA may accumulate interest earnings which accumulate tax-free and remain tax free if used to pay qualified medical expenses.
HSA participation is becoming more popular. The benefits include the ability to take a tax deduction for contributions the account holder makes or someone else makes on his behalf; not recognizing in income contributions made by the employer; having interest/earnings accumulate tax-free; taking tax-free distributions for qualified medical expenses; and not losing the HSA upon a change in employment. Employers may wish to increase the use of the HDHP/HSA benefit plan structure.
