Health Savings Account (HSA)

Any remaining balance in your HSA will become the property of your named beneficiary when you die. If your spouse is your beneficiary, the HSA will be treated as your spouse’s own HSA. If someone other than your spouse is the beneficiary, the HSA stops being an HSA as of the date of death. The beneficiary must include the fair market value of the assets in their taxable income for the year. Death distributions are not subject to the additional 20% tax. 

A Health Savings Account (HSA) is a tax-advantaged custodial account, similar to an IRA, that may be established by an individual who is covered by a high deductible health plan (HDHP). HSAs are used to accumulate savings to pay for current and future medical expenses, and to supplement retirement savings.

A high deductible health plan (HDHP) is a health insurance plan that typically charges lower premiums than traditional full-coverage health insurance, but requires a higher deductible (the amount of medical expenses the individual must pay out-of-pocket before insurance will cover expenses). Individuals covered by an HDHP may save in an HSA to help pay for the medical expenses incurred before the insurance covers their expenses.

To be paired with an HSA, an HDHP must contain certain limits. It cannot cover medical expenses (with exceptions for preventive care and certain other limited coverage) until at least the minimum deductible has been reached, and must limit the amount of out-of-pocket expenses that the individual must pay.

Triple Tax Benefits 
• Tax-deductible – Contributions to an HSA are 100% tax deductible up to the legal limit (similar to an IRA).
• Tax-deferred – Earnings in the HSA grow tax-deferred.
• Tax-free – HSA distributions are tax-free if used to pay for qualified medical expenses.  If money is used for a non-qualified expense, the withdrawal is taxed as detailed below.
Money is Yours
• At the end of the year, the unused money in your health savings account is not Instead, it continues to grow tax-deferred (unlike a Flexible Spending Account).
• It is your account and is not tied to your You can continue taking tax-free qualified distributions from your HSA even if you no longer participate in an HDHP. These characteristics make HSAs useful for not only paying current medical expenses, but also for saving for medical and other expenses that may arise in retirement.
You have control over choosing and directing your investments
• Some HSA providers limit the investments available for your HSA to money markets, mutual funds and other liquid assets. This is advantageous if you plan to tap into the HSA regularly.
• If you intend to use your HSA to save money for retirement, HSA providers, such as Mainstar, allow the HSA owner to invest in a wide range of investments similar to an IRA.

You are not required to make an HSA contribution each year, and you can vary the amount you choose to contribute each year.

To establish and fund an HSA, you...

Must be covered by an HDHP as of the first day of the month
Cannot also be covered by a non-HDHP health plan
Cannot be enrolled in Medicare
Cannot be claimed as a dependent on another person’s tax return

You may directly transfer assets from one HSA to another or from an Archer Medical Savings Account (MSA) to an HSA. You may also take a distribution from your MSA and HSA accounts and roll those distributions to an HSA. Rollovers must be completed within 60 days, and only one rollover is allowed in a 12-month period.

An HSA may be invested in the same type of investment options permitted in an IRA, but not all HSA programs offer a broad range of investment options. A Mainstar HSA may be invested in mutual funds or any other type of investment that you would choose for your Mainstar self-directed IRA.

To establish an HSA, you must sign an HSA plan agreement with an HSA custodian. Banks, life insurance companies, mutual fund companies, brokerage firms and other financial institutions that offer IRAs can act as an HSA custodian.

The maximum contribution allowed each year depends on the type of HDHP coverage you have, your age, and how many months during the calendar year you are eligible to contribute to an HSA.

If you are eligible for all 12 months of the year and have self-only coverage:
Contribution limit for 2020 – $3,550

If you are eligible for all 12 months of the year and have family coverage:
Contribution limit for 2020 – $7,100

If you are age 55 or older, you may also make a catch-up contribution of $1,000 per year.

If you are HSA-eligible for only a portion of the year, you must prorate your contribution limit for the number of months you are eligible. For example, if you were covered by an HDHP for 4 months of the year, you may contribute 4/12 of the maximum contribution limit for the type of coverage you had.

HSA contributions made by your employer count towards your annual limit.

If you contribute more to your HSA than you are eligible for in a year, you generally have an excess contribution. Excess contributions are not deductible and must be corrected. To correct the excess, you must remove the excess contribution plus any related investment earnings by your tax return due date, including extensions. Only the earnings are taxable if the excess contribution is removed timely. If an excess contribution is not removed, a 6% penalty applies for each year the excess remains in the HSA.

You can establish an HSA at any time you’re eligible to contribute. If you want to make an annual contribution for this year, you have until your tax return deadline, generally April 15 of next year, to establish the HSA and make the contribution. To take a tax-free qualified distribution to pay medical expenses, the HSA must be established before the medical expense was incurred.

You may choose to take a distribution at any time. A distribution that is used to pay for unreimbursed qualified medical expenses is tax-free—even if you, your spouse or your dependent who incurred the expense is no longer covered by the HDHP or is not an HSA-eligible individual. With tax deductible contributions, tax-deferred earnings, and tax-free qualified distributions, HSA money may never be taxed. See IRS Publication, 502, Medical and Dental Expenses, for a list of qualified medical expenses (www.irs.gov).

HSA distributions that are not used to pay for qualified medical expenses must be included in your taxable income for the year and are subject to an additional 20% tax. The 20% tax does not apply to distributions made after your death, disability, or attainment of age 65. This means that you may build up your HSA balance to help pay for medical expenses in retirement, and if you want to use the money for other things after age 65, you may take distributions without the additional 20% tax.

In addition to the contributions you make as the HSA owner, some employers also choose to make HSA contributions to their employees’ HSAs.

You may take a tax deduction for any HSA contribution you make to your HSA. HSA contributions made by your employer are deductible by your employer.

You are not required to make an HSA contribution each year and you can vary the amount you choose to contribute each year.