Roy J. Ramthun
Roy J. Ramthun, president of HSA Consulting Services, LLC, a health-care consulting practice specializing in HSAs, based in Houston. Formerly, he was a senior adviser to the Secretary of the US Treasury. HSAConsultingServices.com
A little-noticed portion of the failed health-care bill introduced by House Republicans in March would have dramatically expanded the benefits of tax-advantaged savings accounts that are used to pay health-care expenses. These accounts, called Health Savings Accounts (HSAs), give people enrolled in certain health insurance plans with high deductibles a tax break by allowing them to use money that is not subject to income tax to pay eligible medical expenses.
There is some talk that any future attempt to replace the Affordable Care Act (Obamacare) would likely revive the proposed HSA changes in some form. But even without the proposed changes, there is much about today’s HSAs that many people don’t fully understand—and that’s a shame, because there are many benefits to be had from using an HSA wisely.
Here are answers to key questions about HSA rules that may help you obtain the greatest benefits from your account and/or avoid extra expenses and penalties…
Should I put money in an HSA rather than a retirement account such as a 401(k) if I cannot afford to do both? That depends on whether your employer matches retirement plan contributions. If it does, those matched contributions make the 401(k) the best investment option available. But if there is no matching—or if you have already earned your maximum employer 401(k) match in a given year—an HSA’s tax advantages make it a very attractive option.
My HSA is basically a bank account that pays little or no interest—how can it be an attractive long-term investment account? Many HSAs earn little or no interest, which is fine if you want to use your HSA to pay only immediate health expenses. But many financial institutions allow you to invest your HSA funds in such things as mutual funds and even stocks…and then use that money for health expenses in later years. If yours doesn’t, consider using the website HSASearch.com to find an HSA that offers more options. Examples: HealthSavingsAdministrators (HealthSavings.com) and HealthEquity (HealthEquity.com) offer access to numerous low-cost, highly rated Vanguard mutual funds.
My employer selected the bank where my HSA is—am I stuck with it? You have the right to open another HSA wherever you like—but it also is worth keeping open the HSA at the bank your employer selected. An employer often will make HSA contributions via payroll deductions only to the bank that it has selected. If you prefer to invest elsewhere, periodically transfer money from the employer-selected HSA directly into an HSA of your choosing.
Helpful: Payroll deductions are a smart way to make HSA contributions because they avoid Social Security and Medicare payroll taxes—in addition to income taxes.
Are there restrictions that would make me ineligible to contribute to an HSA? Yes, in some circumstances—for instance, if you are enrolled in Medicare…if you can be claimed as a dependent on someone else’s tax return…or if you are covered by an additional insurance plan that pays benefits before your high-deductible plan does (including a “general purpose” health Flexible Spending Account rather than one limited to dental and vision coverage), you are not eligible to contribute.
Helpful: There are no income limits to be eligible for an HSA, and you don’t have to be employed or self-employed if you meet the other qualifications. Even if your employer does not offer an HSA, you can open one on your own as long as you are covered by an HSA-qualified insurance plan.
Can my spouse have a separate HSA account, and is that an advantage? Your spouse can have a separate HSA even if he/she is covered by the same HSA-qualified health insurance policy as you. But there’s only one advantage to having separate accounts.
To understand the advantage, first you need to understand how contribution limits work. You may already know that if you qualify for an HSA, you can contribute up to $3,400 in 2017 as an individual or $6,750 as a family without ever paying federal taxes on that money or on any money that the account gains through investments or interest.*
If you are 55 or older, you can add an annual “catch-up” contribution. If your spouse doesn’t have an HSA account, that catch-up contribution is limited to $1,000 in total. But if your spouse does have a separate account (and also is 55 or older), each of you can contribute an extra $1,000 for a total of $2,000.
What happens if I need to take money out of my HSA to pay a nonmedical expense? An HSA holder of any age must pay income tax on money withdrawn from the account that is used to pay nonqualified expenses. Also, if you are younger than 65, you have to pay a penalty of 20% on that withdrawn money.
What if there’s money left in my HSA when I die? If you have designated your spouse as the account beneficiary, that spouse can take over and use the HSA. If you designate someone other than your spouse as beneficiary, the account ceases to function as an HSA after your death. (Your heirs can use dollars remaining in your HSA tax-free to pay eligible medical expenses you incurred but had not yet paid.) Any remaining money may be taxable income for the beneficiary, but that beneficiary will not face HSA penalties.
If you fail to designate any beneficiary or if all named beneficiaries die before you, money in your HSA will be distributed to your estate and may be taxable on your final income tax return.
*In most states, you also don’t pay state income tax on HSA contributions, but residents of Alabama, California and New Jersey do…and residents of New Hampshire and Tennessee pay state tax on HSA investment gains.
