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10 HSA Little Known Facts
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Health savings accounts help individuals sock away money for health care costs incurred after the account is open. They're used in conjunction with a high deductible health insurance plan, and they offer some great tax benefits.
Contributions made to HSAs lower one's taxable income, and payments made from a HSAs for eligible expenses aren't taxed. Plus, the funds can be invested and interest can accrue in an HSA - tax free.
Used with care, HSAs can be a smart financial tool. But there are rules which must be followed.
#1: Should HSA owners show their health insurance cards for medical services even if they are paying the full expense themselves with their HSA?
A: Yes. Some HSA owners make a logical but potentially expensive error in not using their medical insurance cards for HSA purchases.
Even though HSA owners have to pay for the full medical expense when they are still below their deductible, they should show their insurance card to benefit from any discount the insurance carrier may have negotiated with the provider. Also, if an HSA owner shows an insurance card, the insurance carrier can track the expense against the deductible.
#2: Can HSA owners that enroll in Medicare use their HSA to pay for Medicare premiums even though they are no longer HSA-eligible?
A: Yes. The majority of Americans will start Medicare at age 65 and therefor lose eligibility to contribute to an HSA. Losing eligibility for an HSA means that the HSA owner cannot contribute new money but does not stop a person with an HSA balance from continuing to use that balance for medical expenses.
Someone age 65 or older has a special opportunity to use that money to pay for Medicare premiums. This is an incredible feature of HSAs: the ability to pay for Medicare premiums with pre-tax dollars.
However, this feature is only available to Americans that have built up a balance in their HSAs prior to losing eligibility. The Social Security Administration will directly deduct the Medicare premiums from Social Security payments, so an HSA owner can write a check from their HSA payable to his or her self to reimburse for the Medicare premium paid directly by Social Security.
#3: Can HSA owners wait to contribute until they have a known medical expense?
A: Yes, provided that the HSA owner has opened the HSA (to set the establishment date), remains eligible for an HSA (necessary to put more money into an HSA), and has not yet contributed the maximum limit for the year.
Some HSA owners prefer to keep their HSA balance low and only fund the HSA when they know they will need the money. This approach may result in lost tax benefits as individuals have a limited period of time to contribute to an HSA for a particular tax year.
Also this approach will not result in the building of a balance in the HSA over time to cover larger expenses. However, for individuals tight on funds, this approach will allow for minimizing the HSA cost while still getting the tax benefits.
#4: Is a college student covered under her parents' HDHP eligible for an HSA?
A: Yes, if the college student cannot be claimed as a dependent on their parent's tax return. College students under age 24 are likely to be claimed as dependents of their parents and ineligible for an HSA.
A college student can open his or her own HSA and can contribute up to the HDHP limit if covered under the parents' family HDHP and not a dependent. The parents would also be able to contribute the family limit. The student and the parents would not need to coordinate family HSA limits such that combined they stayed under the maximum.
The downside to this is that the parents cannot use their HSAs to pay for the student's qualified medical expenses because the student would not be a tax dependent (even though still on their insurance).
The Patient Protection and Affordable Care Act's requirement that children can remain on the parents' health plan until age 26 increases occurrences of this issue happening. A more logical approach would be to take away a nondependent child's eligibility for an HSA but allow the parents to use their HSAs to fund the child's medical expenses until age 26.
#5: Are there valid reasons to establish more than one HSA?
A: Yes. The most common reason to have multiple HSA accounts is to allow for different investment choices and different account features.
Another common reason is that an employer requires an HSA to be opened at a specific HSA custodian in order to receive employer HSA contributions.
An HSA owner may not prefer that particular custodian but keeps the HSA open in order to receive the employer contributions. The HSA owner could then open a separate HSA at a more preferred HSA custodian and periodically transfer HSA funds from the non-preferred HSA custodian to the preferred HSA custodian.
#6: If an HSA owner has family HDHP coverage is a joint account allowed?
A: No. All HSAs are individual accounts.
This answer confuses many HSA owners as they specifically enroll in a "family" health plan, review the HSA law to determine the "family" maximum HSA limit and use their HSA for their "family's" medical expenses (spouse and dependents).
This rule is why spouses age 55 or older must set up a separate HSA for their $1,000 catch-up contribution.
#7: Can any person make HSA contributions for an HSA owner?
A: Yes. Any person may make an HSA contribution for any other person including family members, employers, even neighbors and strangers.
Whether or not the contributor or the HSA owner gets the tax break depends on the relationship.
If someone other than an employer or spouse makes an HSA contribution on behalf of the HSA owner, the HSA owner gets the HSA deduction, not the person who contributed.
#8: Can HSA fees be directly withdrawn from the HSA account?
A: Yes. HSA administrative fees may be deducted directly from the HSA and the HSA owner does not have to pay taxes or penalties on the amount of the fee.
Paying fees by directly debiting the HSA allows HSA owners to pay the fees with tax-free dollars, a welcome approach for most HSA owners.
#9: Can an individual move IRA money into an HSA?
A: The law allows individuals a one-time transfer of IRA assets to fund an HSA provided: 1) they are eligible for an HSA, 2) they have a permitted IRA with sufficient funds, 3) they have not already completed an IRA to HSA funding distribution, and 4) the names and Social security numbers are the same on the IRA and HSA.
The amount transferred may not exceed the amount of one year's HSA contribution limit. The technical term for this transaction is a "qualified HSA funding distribution," not "transfer."
#10: What is the HSA eligibility rule regarding not being a dependent on someone else's income tax return? If you are a dependent on someone else's tax return, are you eligible for an HSA?
A: No. This rule serves primarily to prevent children from opening and funding HSAs. The rule does create some interesting scenarios for adult children.
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Thank you,
George Knox, CLU, ChFC
Please Note: The information and materials herein are provided for general information purposes only and are not intended to constitute legal or other advice or opinions on any specific matters and are not intended to replace the advice of a qualified attorney, plan provider or other professional advisor. This information has been taken from sources which we believe to be reliable, but there is no guarantee as to its accuracy. In accordance with IRS Circular 230, this communication is not intended or written to be used, and cannot be used as or considered a 'covered opinion' or other written tax advice and should not be relied upon for any purpose other than its intended purpose.
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� 2015 HR 360, Inc. - All rights reserved
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