15 Mar Do I qualify for a Health Savings Account (HSA)?

Q. How do Health Savings Accounts (HSAs) work and can I fund one with pre-tax money? Is it a one-time investment, and how do I qualify?
— Saver

A. As with most things taxes, the rules can be complicated.

A Health Savings Account (HSA) is a tax-advantaged medical savings account available to taxpayers who are enrolled in a high deductible health plan (HDHP).

A high deductible health plan (HDHP) is a health insurance plan with lower premiums and higher deductibles than a traditional health plan, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

He said HDHPs are a form of catastrophic coverage, intended to cover for catastrophic illnesses.

“A qualifying HDHP must have a minimum deductible and out-of-pocket maximum which the Internal Revenue Service may modify each year to reflect changes in the cost of living,” Papetti said.

According to the instructions for IRS Form 8889, “This limit does not apply to deductibles and expenses for out-of-network services if the plan uses a network of providers. Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit is reached.”

Papetti said the funds contributed to an account are not subject to federal income tax at the time of deposit.

“Unlike a flexible spending account (FSA), HSA funds roll over and accumulate year to year if they are not spent,” he said. “HSAs are owned by the individual, not the employer.”

Papetti said HSA funds may currently be used to pay for qualified medical expenses at any time without federal tax liability or penalty.

Withdrawals for non-medical expenses are treated very similarly to those in an Individual Retirement Account (IRA) in that they may provide tax advantages if taken after retirement age, and they incur penalties if taken earlier, he said.

Papetti offered some additional details:

• Contributions to an HSA plan are 100 percent deductible (up to the legal limit) — just like an IRA.
• For 2017 the HSA contribution limit is $3,400 for single participants and $6,750 for families.
• Contributions can be spent on out-of-pocket medical, dental or vision care expenses.
• Participants over age 55 can contribute an extra $1,000 as a catch up.
• HSAs must be paired with high deductible health insurance plans.
• Unlike a Flexible Spending Account, HSAs are never forfeited at the end of the year.
• Employees can use a variety of investment options including mutual funds, money market accounts, and savings accounts.
• HSA contribution amounts can be changed at any time during the year.

To answer your specific question about whether you can make a one-time investment, you can actually contribute annually up to the specified limit as long as you are enrolled in a high deductible health plan, Papetti said.

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This post was first published in March 2017.