Health savings accounts, also known as “HSAs,” were established as part of the Federal Medicare Prescription Drug, Improvement, and Modernization Act in 2003. That Act, also known as Medicare Modernization Act or “MMA,” was the largest overhaul of the Medicare program in federal history and allowed for HSAs. Specifically, the MMA created a new statute that allowed for the use of HSAs and replaced the old medical savings account laws by expanding allowable contributions and participation from employers.
In simple terms, a health savings account is similar to a personal savings account but is reserved for health care expenses. To utilize and possess an HSA, an individual must possess a high deductible plan as their health insurance. High-deductible health plans may also be called catastrophic health care plans.
Once again, an HSA allows an individual to deposit pre-tax money into an account to pay future medical expenses for themselves or their family. HSAs were designed to allow an individual with a high deductible health plan to pay for deductibles and copayments, along with other qualified medical expenses, by putting pre-tax money into the HSA.
Who Is Eligible to Open a Health Savings Account?
As mentioned above, not everyone can open and utilize an HSA. To open and contribute to an HSA, an individual must:
- Be eligible for a high deductible health plan;
- The health care plan must meet the tax year’s minimum deductible and maximum out-of-pocket threshold.
- The minimum deductible as of 2023 for an individual is $1,500 or $3,000 for families;
- The maximum out-of-pocket threshold as of 2023 is $7,500 for individuals or $15,000 for families;
- Not be enrolled in Medicare or Medicaid;
- Not be covered by another health care plan, such as a spouse’s healthcare plan or private plan;
- Not be enrolled in a military plan, such as Tricare
- It is important to note that an individual cannot have utilized Veterans Administration (“VA”) benefits within the past three months;
- Not be eligible to be claimed as a dependent on another person’s tax return; and
- Not possess any alternative medical savings accounts that would disqualify them from participation in an HSA, such as a health reimbursement account or flexible spending account.
Once again, a person eligible to contribute to an HSA will be enrolled in a high deductible low premium health insurance plan. Additionally, contributions made to an individual’s HSA will be tax-free if the money is used to cover qualified medical expenses.
Importantly, the money in an HSA may also be utilized for dental and vision expenses. It is also important to note that any money that remains in an HSA at the end of the tax year will remain in the HSA. This means that end-of-the-year balances in an HSA will carry over indefinitely and may be utilized even if the owner of the HSA changes insurance plans, jobs, or retires.
What Are Advantages of Utilizing an HSA?
As discussed above, there are numerous advantages of utilizing and contributing to an HSA, including, but not limited to:
- Funds that are deposited in an HSA are not taxed;
- Payments made with HSA funds apply toward the individual’s deductible;
- Payments made with HSA funds are not taxable on the payment;
- An individual’s employer may contribute to the employee’s HSA account, with the employee retaining complete control and ownership over the account and contributions;
- All of the unused assets in the HSA account will roll over to the next year indefinitely; and
- The account owner has complete control over the funds and may decide how much money to set aside for their or their family’s healthcare expenses.
What Are Some Disadvantages of Utilizing an HSA?
Although there are numerous benefits associated with utilizing an HSA, there are also some disadvantages, such as:
- It is hard for an individual to budget for the HSA because illnesses and necessary medical care are often unpredictable;
- There is a maximum of how much money that may be contributed to the HSA account
- For the 2023 tax year, the maximum contribution amount is $3,850 for a single person or $7,750 for families.
- There is also a $1,000 additional contribution that may be made by individuals aged 55 or older;
- Any money that is withdrawn or utilized for nonmedical purposes is subject to taxation and may affect a person’s income tax bracket for the year;
- The individual must have a high deductible health plan that meets all of the above-listed criteria to be eligible for an HSA; and
- Money put in an HSA could have been utilized in another capacity, resulting in a greater return on the money.
How Can HSA Money Be Utilized?
Once again, the money held in an HSA may only be utilized for qualified medical expenses. Importantly the medical expenses may be for either the owner of the HSA, their spouse, or their legal dependents. As far as what is considered a qualified medical expense, the Internal Revenue Service (“IRS”) releases an annual publication that outlines what is considered a qualified medical expense.
Examples of qualified medical expenses include, but are not limited to:
- Medical costs incurred by the HSA owner, including expenses for certain prescriptions, medical treatments, diagnostic testing, medical evaluations, or almost any other medical cost incurred at a licensed physician’s office;
- Expenses related to auditory medical expenses such as hearing aids or hearing aid batteries;
- Nursing care, whether it be in a nursing home or one’s private residence;
- Mental health care, such as care received from a licensed psychiatrist;
- Expenses related to vaccinations;
- Expenses related to pregnancy prevention, such as a vasectomy;
- Expenses related to the equipment needed for a disability, such as a walking cane or chair;
- Expenses related to emergency expenses, such as an ambulance expenses;
- Expenses related to acupuncture or chiropractic services;
- Certain vision expenses outlined in the IRS’ publication; and
- Certain dental expenses outlined in the IRS’ publication.
Importantly HSA funds may not be utilized for everything medical-related. For example, HSA funds may not be utilized for many elective procedures, cosmetic surgeries, or over-the-counter items related to an individual’s health, such as toothpaste or other toiletries. HSA funds also cannot be used to pay for diapers for one’s dependents.
Do I Need a Lawyer for Help With a Health Savings Account?
As can be seen, numerous benefits are associated with utilizing a health savings account. However, if you have any questions regarding the tax implications of contributing to or withdrawing from your HSA account, best to consult with an experienced financial lawyer in your area.
Tax laws can be complex, but an attorney can help determine your rights and inform you of which options will work best for you. If any disputes or legal conflicts arise in connection with your account and assets, your lawyer can help protect your interests.
An experienced tax law attorney can answer any questions regarding contributing to an HSA account and how those contributions may impact your taxes. Additionally, a tax attorney can guide you on any tax penalties associated with withdrawing funds from an HSA account for non-qualified medical expenses. Lastly, a lawyer can provide you with updates if there are any changes to the law that might affect your account.