HSA plans are tax-advantaged accounts created for individuals to set money aside today to pay for medical expenses in the future. Each dollar contributed (up to the annual limit) results in a deduction for personal income taxes and is not taxable when withdrawn, as long as the money is used for qualified medical costs.

Am I a good fit for an HSA?

A good candidate is generally healthy and wants to save for future health care expenses. To qualify, the individual must be covered by a high deductible health plan (HDHP). For 2020, the deductible must be $1,400 for an individual plan or $2,800 for a family. The plan also has to conform to an out-of-pocket maximum of $6,900 for individuals and $13,800 for families. Coverage from any other health coverage in addition to the HDHP will disqualify the use of an HSA.

How does an HSA Work?

The employee owns and controls the money in the HSA account. Money that is unused at the end of the year rolls forward into the next year. For 2020, the contribution limits are $3,550 for individuals with self-only coverage and $7,100 for family coverage. Individuals 55 or older can contribute an extra $1,000 per year. The HSA can be used to pay for family members even if they are not covered by the plan. At the age of 65 money can be withdrawn from the HSA for any reason, so this can also a good way to save for retirement.

What are the Tax Benefits of an HSA?

  • Funds can automatically come from your paycheck into the HSA. Since no taxes are paid on contributions, any amount put into the account lowers taxable wages.
  • The HSA will grow tax-deferred. Some HSAs pay interest on the account balance, it will not be considered taxable interest income, dividends, or any capital gains. Additionally, employer contributions to an HSA are not considered taxable income to the employee.
  • Distributions used to pay for qualified medical expenses including nursing service, eye care, psychiatric care, surgical expenses, fertility treatments, and medical equipment is completely tax-free. However, withdrawals for anything non-medical will incur a 20% penalty.

If you want more information on HSA accounts or need help with tax preparation, contact our professionals at The Innovative CPA Group at 203-489-0612.  Or contact us online