HSA Plans

What is the HSA plan

Health savings accounts (HSAs) are tax-deferred savings account that helps contributors save and invest for future qualified medical expenses that are not fully covered by their insurers (including deductibles, copayments, and coinsurance). In short, HSAs enable you to set aside pre-tax income to cater for healthcare expenses that your insurance doesn’t pay.

HSAs came about as part of the Medicare Prescription Drug, Improvement, and Modernization Act.

Typically, most HSAs are run and administered by a qualified HAS trustee which can be a bank, credit union, insurance company, or anyone already allowed by the IRS to be a trustee of IRAs or Archer MSAs.

How does an HSA plan work

HSAs are only available with High Deductible Health Plans (HDHP). These plans are characterized by lower premiums and high deductibles.

You are allowed to contribute pretax income to fund a HAS hence reducing taxable income which effectively reduces your taxes.

Qualified Withdrawals from HSA to pay for eligible health-related expenses are tax-free (health care expenses your health plan doesn’t cover). You are allowed to use HSA funds to cover health care costs until you reach the plan’s deductible.

HSA funds can also be used to cater for coinsurance or copays until you reach the plan’s out-of-pocket limit.

Example

Let’s say your HDHP has a deductible of $1,500 and a maximum out-of-pocket of $3,000. Should you encounter an eligible medical expense that requires a $1,500 deductible, and the plan agrees to split the bill 80/20. The plan will pay 80% of covered medical expenses after the deductible, and you will cater for 20% in coinsurance. Should any additional eligible expenses occur after the deductible, You will pay 20% of those bills until you reach another $1,500 out of your own pocket. The limits may not be applicable to out-of-network or ineligible expenses. When the total qualified medical expenses reach $3,000(Your maximum out-of-pocket), Your HDHP will pay 100% of the rest of the covered expenses for that plan year.

A HAS is key in that it will help cater to the deductibles. Remember your Contributions accumulate until utilized.

 Qualifying for HAS

As per IRS guidelines, for you to qualify for an HSA, you:

• Must be enrolled under a high deductible health plan (HDHP) on the first day of that month.
• Do not have any other health coverage, even the one that belongs to your spouse (some exceptions apply).
• Not enrolled in Medicare
• Are currently Not enrolled in TRICARE or TRICARE for Life
• Have not been named as someone’s dependent in prior-year tax return
• Not receiving medical benefits from the Veterans Administration.
• Don’t have access to any disqualified alternative medical savings accounts e.g. Flexible Spending Account or Health Reimbursement Account.

HDHPs are required to adhere to the following IRS limits to be considered HAS-qualified.

Source: Tax forms and instructions

IRS HSA limit 2022

For 2022 the limits are as below;

• $3,650 for an individual in 2022 ($3,600 in 2021)
• $7,300 for a family in 2022 ($7,200 in 2021)

• $1,000 for HSA Catch up contributions for those 55 and older in 2022

 IRS HSA limit 2021

2021 is subject to;

• $3,600 for an individual in 2021 ($3,550 in 2020)
• $7,200 for a family in 2021 ($7,100 in 2020)

• $1,000 for HSA catch-up contributions for those 55 and older in 2021

How much can you contribute to HSA in 2020

IRS has set limits on how much can be contributed to an HSA as;

• $3,550 for an individual in 2020 ($3,500 in 2019)
• $7,100 for a family in 2020 ($7,100 in 2019)

• $1,000 for HSA catch-up contributions for those 55 and older in 2020

Remember, the annual limits above take into account the total contribution made by both employee and the employer.

HSA qualifying expenses

Your HSA can be used to cater for qualified expenses, tax-free, to cover the following:

• HDHP coverage or deductibles,
• Copayments and coinsurance(out-of-pocket maximum or less),
• Qualified prescription, dental expenses or medical, vision, and
• Other qualified medical expenses that HDHPs might exclude.

HSA out of pocket

This is the upper limit (the stop-loss limit) of your financial exposure during a plan year. For some HDHPs, the out-of-pocket maximum is the same as the deductibles.

HDHPs out-of-pocket maximum is inclusive of;

• In-network deductibles,
• copayments, or
• coinsurance (excluding insurance premiums)

Most HDHPs do not include out-of-network charges in your out-of-pocket maximum. They may require higher or separate out-of-pocket limits for out-of-network care.

Once you are above the plan’s limit for the year, HDHP will cater for all additional in-network, eligible expenses, regardless of the plan’s current copayment or coinsurance arrangements.

Can you deduct out of pocket medical expenses

IRS allows filers to deduct medical expenses that are higher than 7.5% of their adjusted gross income (AGI). For example, If person A had an AGI of $50,000 in 2020, they will be allowed any amount above $3,750(7.5%*$50,000). This is the threshold for their medical expenses. Also, let’s assumed they incurred unreimbursed, out-of-pocket medical costs of $5,000, this means they can only deduct $1250.

Qualifying medical and dental bills accrued by the filer, their spouse, and dependents (listed on your tax return) count toward the deduction limit. Medical bills catered for a deceased dependent, before or after their death is also deductible.

Are HSA contributions prorated

New joiners into an HSA-qualified HDHP and who happen to open an HSA mid-year have two options;

• Contribute a prorated amount as per the number of months they are eligible or
• Maximize the IRS full-contribution rule. They will contribute the entire yearly maximum according to their age and coverage.

Prorating the contribution is advisable if you aren’t sure of your enrollment status not certain during the entire next tax year.

The full-contribution rule (or last-month rule) is advisable if you are certain of being enrolled for the 13-month test period) and you have been enrolled by December 1st. In general, if you fail to maintain an HSA-qualified HDHP during the entire testing period, you will have to pay taxes and penalties for making an excess contribution.

HSA prorated contribution limits 2022

Table below show what will be contributed based on the number of months contributed in the year 2022.

Source: IRS publication 969

Roll over IRA to HAS

Funding your HAS account via Transfers from an IRA is allowed.

HAS Account holders are allowed only a once-per-lifetime trustee-to-trustee transfer. This should be from;

• Traditional or
• Roth IRA

Transfers from Simple or SEP IRA are not allowed.

Please remember, that these transfers form part of the annual contribution limit, and are capped to the maximum annual contribution for the year.

Only trustee-to-trustee transfer is allowed and the account holder must remain enrolled in an HDHP and eligible for HSA during the whole testing period else the transferred funds are subject to income taxes on top of the 10% early access penalty.

Are HSA employer contributions taxable

Contributions made by employers on behalf of eligible employees are not considered income and hence not taxable. Employers are inclined to pay this on behalf of employees as;

• Ensures employees’ access to quality healthcare.
• Helps employees lower their HDHP premiums
• Employers can claim this contribution as a deductible.

Employers are allowed, under certain conditions, to make eligible for higher contributions for “non-highly compensated employees” without a cafeteria plan. Otherwise, Employer contributions based on the completion of wellness activities would still require contributions through a cafeteria plan.

All contributions to an HSA, other than contributions made by employers, are allowed as a deductible on the eligible employees’ return whether itemized or not.

Please also note, Distributions from an HSA for the purpose of paying qualified medical expenses are not taxable.

Bottom line

HSAs provide a triple tax advantage:

• Funded by pre-tax dollars
• The account gains and interest on the account are free of federal (and most state) income tax, and
• Distributions for qualified medical expenses are tax-free.

Secondly, the plan accords members the flexibility of investing in these HSA funds which, while riskier, immensely increases the potential for growth.

On the downside, If you are likely to incur substantial health costs in near future, the HDHP which is a condition to open an HSA is not the best choice for you. As much as premiums are low the catch is you finding it hard—even with savings in an HSA—to come up with extra cash to cover deductibles for the costly medical procedure.