Understanding Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) offer a smart way to manage and save for medical expenses. By setting up an HSA, you create a tax-exempt account with a qualified trustee, allowing you to cover medical expenses for yourself, your spouse, and your qualified dependents. However, these expenses must not be reimbursable by insurance or other sources, and you cannot claim them as a medical expense deduction on your tax return. Now, let’s explore how you can qualify for an HSA and the numerous benefits it offers.

Qualifying for an HSA

First and foremost, to be eligible for an HSA, you must meet several key requirements:

  • High Deductible Health Plan (HDHP): You need to be covered under an HDHP. This plan type features higher deductibles but lower premiums, making it a cost-effective option for many.
  • No Other Health Coverage: You cannot have any other health insurance, except for specific coverages like disability, dental, vision, telehealth visits, and long-term care.
  • Medicare Enrollment: You must not be enrolled in Medicare.
  • Dependent Status: You cannot be eligible to be claimed as a dependent on someone else’s tax return.

Additionally, under the Last-Month Rule, if you are eligible on December 1 of your tax year, you are considered eligible for the entire year. Special exceptions apply if you do not remain eligible throughout a full 12-month period due to death or disability.

Spousal HSAs

While HSAs are individual accounts, you and your spouse must each open a separate HSA. However, if only one spouse has an HSA, the funds in that account can still be used to cover medical expenses for the other spouse and family members.

High Deductible Health Plan (HDHP) Essentials

Your HDHP must meet certain criteria:

  • Preventive Care Benefits: The plan can cover preventive care benefits without a deductible or with a deductible below the minimum limit.
  • Minimum Deductibles: For 2024, the minimum annual deductible is $1,600 for self-only coverage and $3,200 for family coverage.
  • Prescription Drug Plans: HDHPs can include prescription plans as long as benefits are provided after meeting the minimum annual deductible.

Be cautious if you have a family plan with both family-wide and individual deductibles. If any individual deductible is below the minimum required for family coverage, the plan does not qualify as an HDHP.

Contribution Limits for 2024

You can make contributions to your HSA until the tax return due date without extensions. The annual contribution limits for 2024 are:

  • Self-only coverage: $4,150 (under age 55) or $5,150 (age 55 or older).
  • Family coverage: $8,300 (under age 55) or $9,300 (age 55 or older).

For married couples, if both are eligible, the total family contribution limit is $8,300, split equally unless otherwise agreed. Special rules apply if either spouse is over age 55 or enrolled in Medicare.

Utilizing HSA Funds

You can use distributions from your HSA tax-free if they cover qualified medical expenses not reimbursed by insurance. However, using HSA funds for other purposes results in taxes and a 20% penalty unless you are over age 65 or have died. Qualified medical expenses include prescriptions, over-the-counter medications without a prescription, insulin, and menstrual care products. Note that while you cannot use HSA funds for your HDHP premiums, you can use them for long-term care premiums, health coverage while unemployed, and health insurance premiums if you are over age 65 (excluding Medigap).

Employer Participation

Employers can also contribute to your HSA, and these contributions are excluded from your taxable wages.

What Happens After Death?

If your spouse is the beneficiary of your HSA, they become the account holder after your death. If someone else inherits the HSA, its fair market value (FMV) becomes taxable to the beneficiary in the year of your death, with certain reductions possible for qualified medical expenses paid within a year of your death.

Final Thoughts

HSAs offer a flexible and tax-advantaged way to save for medical expenses. Whether you are single or have a family, understanding the rules and benefits of HSAs can help you maximize your savings and manage healthcare costs effectively. Always consider consulting a tax professional for personalized advice and to navigate any complexities that may arise.

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