Will HSAs Make America Great Again?
Healthcare is in the news. Talk of the repeal of the Affordable Care Act is everywhere. There is also much speculation about what could follow and what would replace it. At this point, no one really knows for sure.
However, there is some basis for believing that Health Savings Accounts (HSAs) may play an important role in whatever comes next for this country’s healthcare system. Both President Elect Trump and Republican congressional leadership have consistently voiced support for HSAs and their expansion. If you are not familiar with HSAs, now might be a good time to learn the basics because these accounts may be about to take center stage.
How HSAs Work
HSAs first became available January 1, 2004. Over the past few years, the number of HSAs has grown rapidly. An HSA is a tax-free account that is used to pay for qualified medical expenses that aren’t covered by insurance. It’s like an IRA in that it’s a custodial or trust account set up with a financial institution. An HSA is owned and controlled by you and not your employer.
An HSA is designed to be used in conjunction with a High Deductible Health Plan (HDHP). The HSA can be used to pay for health expenses until the plan deductible is met. The HDHP would then cover the high cost medical expenses. To contribute to an HSA, you must have an HDHP. If you are not sure if your plan qualifies, check with your employer or your insurance company.
Fully Deductible Contributions
You do not need to have earned income to be able to contribute to an HSA. There is good news for those with higher incomes. There are no income limits. No one makes too much money to be eligible to contribute to an HSA. Contributions are always fully deductible.
You may contribute on your own to an HSA, without the involvement of your employer, or your employer may make contributions to an HSA on your behalf. The amount you may contribute depends on your age and the type of health insurance coverage that you have. For example, if you are under age 55 and have self-only HDHP coverage, you may contribute up to $3,400 for 2017. If you are under age 55 and have family HDHP coverage, you may contribute $6,750 for 2017. Those who are age 55 and over in 2017 may contribute an extra $1,000.
Tax-Free Distributions
Any distributions you take from your HSA to pay for qualified medical expenses are tax-and-penalty-free. Yes, you heard that right. This is the best of both worlds. You can have both fully deductible contributions and tax-free distributions with an HSA. Generally, qualified medical expenses are those that qualify for the medical expense deduction. This includes most medical, dental, vision and chiropractic expenses. You may take tax-and penalty-free distributions to pay for your spouse or children’s medical expenses as well as your own. You can take a tax and penalty-free distribution in 2017 to pay for medical expenses in a previous year, as long as the expenses were incurred after the HSA was established.
Watch for HSA Expansion
Keep an eye on HSAs as the debate over the future of the health care continues. These accounts could be expanded with higher contribution levels and more opportunities for tax-free distributions. Knowing how HSAs work and how they can benefit you, is one way you can stay one step ahead in these rapidly changing times for our healthcare system.