If you have been in the insurance industry for a while, you know the basics and the advantages of Health Savings Accounts (HSAs). Individuals enrolled in a high deductible health plan (HDHP) are eligible for an HSA account, which enables them to save tax-free money for medical expenses. The popularity of HSA-HDHPs has increased significantly in the past 10 years. According to a report released by AHIP in April 2018, enrollment in HSA-HDHPs rose from 4.5 million in 2007 to 21.8 million in 2017, yielding an increase of 400 percent1. As deductibles continue to rise and these numbers continue to grow, it is important to know the ins and outs of HSAs so that we can better advise our clients.
The 2019 Basics
- Max contribution: $3,500 individual; $7,000 family
- Catch-up contribution limits for ages 55+: $1,000
- HDHP minimum deductible: $1,350 individual; $2,700 family
- HDHP maximum out of pocket: $6,750 individual; $13,500 family
HSA Triple Tax Savings
- Tax deductions on contributions to the account
- Tax-free earnings on interest and investments and
- Tax-free withdrawals when used for qualified expenses
Qualified medical expenses are more than just copays, deductibles, and coinsurance. HSAs may also reimburse health insurance premiums while receiving federal or state unemployment, COBRA or state continuation premiums, qualified long-term care insurance (as indexed by calendar year and age), Medicare (other than a Medicare Supplement policy), and retiree premiums (once HSA owner and insured, if other than owner, are over age 65).
Owners: Owners of C-corporations and 2 percent or less owners of an S-corporation may contribute to an HSA on a pre-tax basis through payroll deduction. HSAs are also available to sole proprietors, partners, and more than 2 percent S-corporation owners to contribute to on an after tax basis with an above-the-line deduction. Owners’ spouse, parents, children, and grandchildren of a more than 2 percent S-corporation owner cannot contribute pre-tax. Like the owner, they must contribute post-tax and can then take an above-the-line deduction.
Contributions and tax benefits: Anyone can contribute to the account however the owner of the account is the individual who receives the tax deduction. This means a parent can contribute post tax to an HSA in their adult child’s name. The child gets the tax deduction on that contribution.
Married individuals who both attain age 55+: If both individuals are covered by a qualified HDHP plan, they can each make the $1,000 catch-up contribution; however they must open two separate HSA accounts in their own names to do so.
Adult child who stays on their parents plan: An adult child can stay on a parent’s health plan until age 26, even if they are not a full-time student, no longer live at home, not a tax dependent, or are married. The parent covering that child can own an HSA and contribute the full family maximum. However, if the child is not a tax dependent (other than the income limitation), the parent cannot use their HSA money for the child’s medical expenses, but the adult child is an HSA-eligible individual with family coverage, so they can set up their own HSA and contribute the full family maximum.
Employee with Medicare, spouse without: Oftentimes, employees stay on their employer’s health plan even though they have Medicare due to the fact that the spouse is not yet 65 and still needs health coverage. If the employer’s plan is a qualified HDHP, and the employee is enrolled in Medicare Part A or Part B, he cannot own or contribute to an HSA. However, if the spouse is covered under the same plan, he or she is eligible to set up an HSA in their own name, and because they technically have family coverage, they can contribute (post tax) the full family maximum plus the additional $1,000 catch up if they are over age 55. As a bonus, they can use their HSA funds for the employee’s qualified expenses. The over-age-65 employee could also contribute, post-tax, through payroll deduction in the HSA in the spouse’s name.
Proration rule for those who become enrolled in Medicare: Federal law states that those over age 65 who enroll in Social Security are automatically entitled to Medicare Part A. In February 2012, a ruling clarified that Americans who are receiving monthly Social Security benefits, and thereby automatically covered by Medicare benefits, cannot decline coverage. These individuals can contribute up to the pro-rated HSA maximum through April 15 of the following calendar year even if they are enrolled in Medicare.
For individuals who do not apply for Social Security, continue working past age 65, and delay their enrollment in age-based Medicare because they are covered by their employer group health plan, Medicare may be retroactive up to six months. In this situation, HSA account holders who apply for Medicare after turning age 65 may need to limit or discontinue their contributions much earlier in order to avoid making excess contributions.
IRA rollover rules: A one time, tax-free, trustee to trustee, irrevocable distribution from a Roth and/or traditional IRA may be made into an HSA. The rollover is limited to the annual HSA max contribution. In addition, the IRA must be in the same name as the HSA owner. SEP and Simple IRA transfers are not permitted.
For more information, contact Cornerstone today.
1America’s Health Insurance Plans (AHIP) (April 2018) Health Savings Accounts and High Deductible Health Plans Grow as Valuable Financial Planning Tools. Retrieved from https://www.ahip.org/wp-content/uploads/2018/04/HSA_Report_4.12.18.pdf