23 Oct Understanding Health Savings Accounts

Q. What are the rules, current maximum amounts, state tax implications for Health Savings Accounts? Can I contribute to existing Health Savings Accounts even after I’m eligible for Medicare, and if I can, may I make those contributions from my IRA?
— Trying to save

A. Health savings accounts (HSAs) can be a great tool for consumers who have high deductible health plans.

The accounts were created to be a companion to such plans, said Laurie Wolfe, a certified public accountant with Lassus Wherley in New Providence.

“The benefit of these accounts is the ability to put away tax-free dollars with which to pay the deductible and co-pays of these types of plans,” Wolfe said.

Wolfe said contributions made via your paycheck are done so on a pre-tax basis. The funds in an HSA are deductible even if you do not itemize your deductions and even if someone other than yourself makes the contribution. Unlike some other medical savings plans, Wolfe said, these accounts have no risk of forfeiture if not used within a certain timeframe.

There are, of course, rules that go along with these tax-advantaged accounts.

For 2015 you must be covered under a high deductible health plan (HDHP), Wolfe said. A health plan is an HDHP if it is a plan which has a minimum annual deductible of $1,300 for self-only coverage and $2,600 for family coverage. Additionally, she said, the maximum annual deductible and other out-of-pocket expenses, such as co-pays, must not exceed $6,450 for self-only coverage and $12,900 for family coverage. Your premium cost is not considered in these amounts, and the plan itself must provide certain preventive care benefits without a deductible or with a deductible that is less than the minimum annual deductible.

To be eligible to contribute to an HSA, you must be covered under an HDHP on the first day of the last month of your tax year — usually December — and have no other health coverage for your medical expenses, Wolfe said.

“You can have other types of insurance such as vision, dental and other policies which provide benefits for specific occurrences,” she said. “Additionally, you must not be enrolled in Medicare and you cannot be claimed as a dependent on someone else’s tax return.”

The maximum amount that you can contribute to an HSA in 2015 is $3,350 if you have self-only coverage and $6,650 if you have family coverage. An additional $1,000 is allowed if you’ve reached the age of 55. And, while the annual limits are totals for husband and wife, the additional $1,000 is allowed per person if separate accounts are maintained. HSAs are individual, not joint, accounts, Wolfe said.

Some states conform to the federal in the tax treatment of HSAs, but of course, New Jersey is not one of them.

“New Jersey does not allow for exclusion from wages of the amount contributed by you or your employer to an HSA,” she said. “Therefore, there will be a difference between your federal and New Jersey wages on Form W-2.”

However, New Jersey does allow a deduction from gross income for unreimbursed medical expenses that were paid during the year, if such expenses exceed 2 percent of your gross income, Wolfe said.

To your specific question: Wolfe said you are not eligible to contribute to an HSA if you are enrolled in Medicare.

“If you enroll during the year, then you are eligible for the part of the year that you were not enrolled and the contributions amounts are prorated by month,” she said. “So, if you have HDHP and self-only coverage and you enroll in Medicare in July 2015, you can only contribute half of the allowable amount, or $2,175 — over age 55 limit $4,350 divided by 2.”

If you are not enrolled in Medicare, you can make a contribution from a traditional or Roth IRA to the HSA, Wolfe said.

“You can only do this once in your lifetime and the annual contribution limits apply,” she said. “HSAs are a great thing.”

HDHPs usually come with much lower premiums than traditional plans and the use of HSAs puts control of the total health care costs into the hands of the taxpayer, Wolfe said. For example, a relatively healthy person who uses very little of the amount he saves in an HSA has a significantly lower total health care cost than if he had had a traditional plan.

Now, while we’ve shared a lot about HSAs here, the rules we’ve discussed are not exhaustive.

Wolfe said there are complex rules for instances where your personal situation changes during the year. These include if you are only qualified for part of the year or you have self-only coverage for part of the year and family coverage for part. There are disqualifications for coverage that does not continue for at least 12 months. And there are rules if you have other accounts, such as Archer MSAs, FSAs or HRAs.

“There are penalties for excess contributions made above the limits and not withdrawn by specific dates and there are reporting requirements on your individual tax return,” Wolfe said. “For this reason, I advise you to seek the advice of a tax professional.”

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This story was first posted in October 2015.