With the April 15th Tax deadline just around the corner there is a lot of talk about ways to save on your taxes. Health Savings Accounts are a great way to save money and possibly lower those taxes. However you do have to have an eligible health insurance plan or you could pay a penalty.
HSAs (Health Savings Accounts) are popular because they are triple tax reducer:
- The money you put in one is pre-tax (not taxable), thus lowering your overall taxable income
- The growth in the account, whether through interest or investment, is also not taxed
- The money you take out to spend on qualified health expenses (as defined by the IRS) is not taxed
It is a win-win-win. The catch is that you have to have an HSA eligible health insurance plan to contribute to an HSA. To make it simple most insurance plans clearly say if they are an HSA plan or not. But sometimes you just aren’t sure, or aren’t sure why your plan isn’t eligible.
An HSA eligible plan is a High Deductible Health Plan (HDHP). That means for an individual in 2015 the deductible has to be at least $1300 but not more than $6450. For a family the numbers are at least $2600 but not more than $12,900.
Being a HDHP isn’t the only consideration. Aside from an annual physical, preventative care screenings/immunizations and very specific preventative care medications, an HSA plan doesn’t waive the deductible for anything. That means no co-pays for office visits, urgent care visits or prescriptions. This is different from a traditional co-pay type plan. You can still have a Bronze Level co-pay plan with $15 or $20 office visits that has a $6000 deductible. But it isn’t eligible for an HSA because of those items where the deductible is waived. An HSA plan is much more like what most people think of a catastrophic plan. It doesn’t pay out unless a significant deductible is reached. This might be a health plan that has a high deductible but it isn’t a “High Deductible Health Plan”. There is a difference.
There are some Silver and even some Gold level HSA plans with deductibles in the $1500 – $2500 range. They still work the same, in that you have to have met the deductible before the insurance pays for anything other than the Annual physical/preventative care screenings. If it covers prescriptions or office visits before that deductible is met it won’t be HSA eligible.
On the other hand you can simultaneously have other types of insurance that don’t invalidate your HSA plan. You could have a separate dental or vision plan. You might have a long term care policy. Life insurance, disability income replacement, workers compensation, hospital indemnity and specific illness coverage all are acceptable. You cannot, however, be enrolled in Medicare, Tricare or be receiving care from the Veterans Administration.
There are limits to what you can contribute to an HSA. Those limits are set by the IRS. For 2015 the limit for an individual is $3350 and for a family (2 or more people) is $6650. If you are 55 or older you get a $1000 catch-up amount. The funds in an HSA roll over from year to you and belong to you, regardless of who deposited them. They are NOT “use-it-or-lose-it”. If you find that you have remaining money in an HSA account, but are no longer on an HSA plan or you become enrolled in Medicare, you can continue to use the money in the HSA for qualified medical expenses. You just cannot contribute more money to your HSA.
While there is no penalty for having an HSA eligible insurance plan and not contributing to an HSA (other than not making use of the tax benefits available to you), there is a penalty for contributing to an HSA if you are not currently enrolled in an HSA eligible health insurance plan for the month in which you made your contribution. Contribution rules get tricky for those who are on an HSA plan for only part of the year or for those who have part of a family on an HSA plan and part not. It is best to consult with a tax advisor for specific situations. Generally there is a 10% penalty for contributing when you were no longer eligible to do so.