A Health Savings Account provides eligible individuals with opportunities to lower their out-of-pocket health care costs as well as their federal tax bill. Participating in a Health Savings Account program can provide eligible individuals with a tax break.
A Health Savings Account operates somewhat like a Flexible Spending Account (FSA) that employers offer to their eligible employees. An FSA permits eligible employees to defer a portion of their pay, on a pretax basis, which is used later to reimburse out-of-pocket medical expenses. Unlike an FSA, whatever remains in a Health Savings Account at year end can be carried over to the next year and beyond. In addition, there are no income phase-out rules, so a Health Savings Account is available to high-earners and low-earners alike.
Health Saving Account Requirements
Naturally, there are a few requirements for obtaining the benefits of an Health Savings Account. The most significant requirement is that an account is only available to an individual who carries health insurance coverage with a relatively high annual deductible. For 2018, the individual’s health insurance coverage must come with at least a $1,350 deductible for single coverage or $2,700 for family coverage. For many self-employed individuals, small business owners, and employees of small and large companies alike, these thresholds won’t be a problem. In addition, it’s okay if the insurance plan doesn’t impose any deductible for preventive care (such as annual checkups). Other requirements for setting up an account is that an individual can’t be eligible for Medicare benefits or claimed as a dependent on another person’s tax return.
Health Saving Account Contribution Limits
Individuals who meet these requirements can make tax-deductible Health Savings Account contributions in 2018 of up to $3,450 for single coverage or $6,850 for family coverage. The contribution for a particular tax year can be made as late as April 15th of the following year. The deduction is claimed in arriving at adjusted gross income. Eligible individuals can thereby benefit whether they itemize or not. Unfortunately, however, the deduction doesn’t reduce a self-employed person’s self-employment tax bill.
When an employer contributes to an employee’s Health Savings Account, the contributions are exempt from federal income, Social Security, Medicare, and unemployment taxes.
An account beneficiary who is age 55 or older by the end of the tax year for which the account contribution is made may make a larger deductible (or excludible) contribution. Specifically, the annual tax-deductible contribution limit is increased by $1,000.
A Health Savings Account can generally be set up at a bank, insurance company, or other institution the IRS deems suitable. The Health Savings Account must be established exclusively for the purpose of paying the account beneficiary’s qualified medical expenses. These include uninsured medical costs incurred for the account beneficiary, spouse, and dependents. However, for Health Savings Account purposes, health insurance premiums don’t qualify.
To learn more about how you can benefit from participation in a Health Savings Account plan, contact your Untracht Early representative.