Health Savings Accounts

Tax savings are available to those who qualify

To better manage escalating costs, many individuals are now choosing health plans with higher deductibles. If you have a qualifying high deductible plan, you may want to consider opening a health savings account (HSA). These accounts provide considerable tax advantages for those who qualify.

An HSA is a tax-exempt trust or custodial account set up with a qualified HSA trustee (typically a bank) to pay or reimburse certain medical expenses incurred by an eligible participant. An HSA does not replace health insurance, but the account holder can use the savings to pay for any out-of-pocket medical expenses. Your employer may help you set up an HSA and make payroll deposits, but you are the actual owner of the account.

An HSA offers several tax advantages over simply putting aside money in a personal checking or savings account. Here are a few highlights:

•   Contributions are deductible.

•   Employers can make tax-free contributions on behalf of employees.

•   Earnings in the account are tax-deferred (some HSA accounts will even let you invest the money you’ve contributed).

•   HSA contributions and earnings are not taxed when distributions are used to pay qualified medical expenses.

•   Upon reaching age 65, distributions can be received penalty-free (i.e., only subject to income tax) for any reason.

•   An HSA is portable (partici­pants are still entitled to the money in these accounts even if they switch employers).

You can make and deduct HSA contributions for the year at any time before the due date (without extensions) for the filing of your return. For 2015, you can make contributions up until April 15, 2016. Let your HSA custodian know if any contributions you make are intended for the prior year. For example, if you deposit money in January 2016 for a 2015 contribution, you need to inform your bank so they code it properly. Some deposit slips let you indicate this as an option.

Money from the account can be distributed for any qualified unreimbursed medical expenses. Only expenses incurred after the HSA has been established are eligible. Qualified medical expenses include costs to diagnose, cure, mitigate, treat or prevent disease, such as the fees associated with being under the care of a doctor, dentist, chiropractor, psychiatrist or psychologist. Acupuncture, ambulatory bills, birth control pills, child birth classes, contact lenses, crutches, dentures, prescription drugs, eye exams, eye glasses, hearing aids, hospital bills, insulin, laboratory fees, travel to medical clinics, vasectomy and wheel­chairs are only some of the items that are considered eligible expenses.

The annual deductible is not less than $1,300 for self-only coverage and not less than $2,600 for family coverage. The annual deductible and other out-of-pocket expenses do not exceed $6,450 for self-only coverage and $12,900 for family coverage. The annual HSA contribution limit is $3,350 for self-only coverage and $6,650 for family coverage.