We received an overwhelming amount of questions regarding H.S.A. accounts this year. Though we can’t answer all of them in one message, we have provided basic information for you below.
Is an H.S.A. the right move for me?
Every taxpayer’s situation is different. Generically speaking, if you qualify, the answer is likely yes. Especially if your employer is offering this type of benefit; then your H.S.A. is treated as a pre-tax deduction which may save you on federal income taxes, state income taxes, and FICA payroll taxes.
What are the benefits of an H.S.A.?
You may enjoy several benefits from having an HSA.
- You can claim a tax deduction for contributions you make to your HSA even if you don’t itemize your deductions on Schedule A
- Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income
- The contributions remain in your account until you use them
- The interest or other earnings on the assets in the account are tax free
- Distributions may be tax free if you pay for qualified medical expenses (see Qualified medical expenses later)
- An HSA is “portable” meaning it stays with you if you change employers or leave the work force and does not have the “use it or lose it” time restrictions applicable to an FSA (Flex Spending Account)
How do I qualify for an H.S.A.?
To be an eligible individual and qualify for an HSA, you must meet the following requirements.
- You are covered under a high deductible health plan (HDHP); ask a GBE advisor for details
- You are not enrolled in Medicare
- You can’t be claimed as a dependent on someone else’s tax return
Tax-free distributions from an HSA
You generally will pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible.
- You may pay these medical expenses directly via H.S.A. check or H.S.A. debit card.
- You may also pay these expenses personally and then draft a reimbursement check, to yourself, from your HSA.
- You may only receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical expenses you incur after you establish the HSA.
- If you receive distributions for reasons other than medical, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax.
- You don’t have to make distributions from your HSA each year.
Qualified medical expenses
Qualified medical expenses are those expenses that generally would qualify for the medical and dental expenses deduction. These are explained in Pub. 502, Medical and Dental Expenses.
- Non-prescription medicines (other than insulin) aren’t considered qualified medical expenses for HSA purposes.
- A medicine or drug will be a qualified medical expense for HSA purposes only if the medicine or drug:
- Requires a prescription
- Is available without a prescription (an over-the-counter medicine or drug) AND you get a prescription for it
- Insulin
- Again, for HSA purposes, expenses incurred before you establish your HSA aren’t qualified medical expenses.
- Qualified medical expenses are those incurred by the following persons
- You and your spouse
- All dependents you claim on your tax return
- You cannot treat insurance premiums (health insurance) as qualified medical expenses unless the premiums are for:
- Long-term care insurance
- Health care continuation coverage (such as COBRA)
- Medicare and other health care coverage if you are 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap)
This may not answer all of your questions regarding HSA, FSA, or Dependent Care (daycare) accounts. For other detailed inquiries please contact your GBE advisor.