Health Savings Accounts - A Double Win!

Michael Davis

Health Savings Accounts, often referred to as HSAs, are tax-free accounts that are used to pay for future, qualified medical expenses.  Like qualified retirement accounts, such as IRAs and 401(k)’s, contributions are tax deductible, and funds in the account can grow, tax-free.  Unlike retirement accounts, proper distributions are not taxed as income.  This creates a double win situation for those who are eligible to establish such accounts.

Establishing a Health Savings Account:

A prerequisite to having a HSA is that you must be enrolled in a High-Deductible Health Plan (HDHP).  A HDHP is a health plan that combines a HSA with traditional medical coverage.  For 2018, the IRS defines a high deductible health plan as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family.

Check with your employer to determine if you are enrolled in a HDHP.  If you aren’t enrolled in a HDHP through work, check with your health insurance provider to determine if you have a qualified policy.  Then, once you determine you have a HDHP policy in place, you can contact your health insurance company for details on setting up a HAS through a qualified trustee.


HSA Contributions and Investments:

The amount of the annual contribution is limited; for 2018, the maximum annual contribution is $3,450 for a single person and $6,850 for a family, with an additional $1,000 available for those persons over age 55 to allow for make up over lost time. Note: no contributions should be made after you have enrolled in Medicare because any such contributions could be subject to penalty.

In 2006, a provision to the HSA law was added that allows a taxpayer, once in his or her life, to rollover IRA assets into a HSA, to fund up to one year's maximum HSA contribution.  This is an important consideration because distributions from the HSA won’t be taxed as income, unlike an IRA.

The funds in a HSA can be invested and reinvested so that the fund can grow, also tax-free.  Funds held in a HSA may be self-directed and may be invested in just about any type of investment, such as stocks, bonds, CDs, real estate and precious metals.  Some of the limitations are that the funds may not be used to own life insurance policies or to invest in collectibles.

Benefits of Establishing a HSA:

There are a number of reasons why you should fully fund your HSA if you qualify to have one. 

Unlike IRAs, funds in a HSA are immediately available to pay for qualified medical expenses, with no penalty and no income tax.  However, if a distribution is made for a non-qualified medical expense, that distribution will be subject to applicable income taxes, as well as a 20% penalty at the federal level.  If you are over the age of 65 and make a non-qualified distribution, income taxes will still be applied, but there will be no 20% penalty assessed. 

A qualified medical expense is liberally defined as just about any medical expense, including co-payments, dental and vision expenses.  However, as of 2010, HSA funds can no longer be used to buy over-the-counter drugs without a doctor's prescription.  HSA funds may not be used to pay for health or dental insurance premiums except in some very limited situations, such as to make COBRA payments or make long term care insurance premium payments.

Funds in a HSA may also be used to pay for Medicare premiums for Parts A, B, and D, once you start receiving Medicare benefits.  If Medicare premiums are automatically deducted from your Social Security monthly payments, you may reimburse yourself from the HSA.

Finally, upon your death, if a HSA account is transferred to a spouse, it transfers tax-free.  However, if it conveys to anyone else, any remaining funds in a HSA account will be considered as taxable income to the beneficiary or beneficiaries, with no stretch provisions to spread that income over a period of years.  Therefore, one consideration for the payment of medical expenses of a deceased is to determine if a HSA account exists that can be used for this purpose. 

Final Thoughts:

Medical expenses are a fact of life; and, as we grow older, such expenses will become a major expense in our retirement.  Setting aside as much as possible into a HSA could be one of the best ways to help plan your retirement since the funds in a HSA can be used liberally to pay for qualified medical expenses, and, unlike other retirement accounts, distributions for qualified health-related expenses are not subject to income taxes.  It is a smart planning move.



This article is intended to provide general, educational information about Health Saving Accounts, and should not be considered as legal advice upon which you should rely.  Please check with your own attorney if you have any questions or would like follow up on any suggestions made within this article.

Michael W. Davis is the Senior Partner of Davis, Agnor, Rapaport & Skalny, LLC.For questions about this article or other questions about estate planning documents, please contact Michael.