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In Part 1 of this two-part article, we introduced the concept of the Health Savings Account. In this portion, we’ll talk about some more of the specifics with regard to implementation of the plan, including contribution limits, setting up the plan, and taking distributions.
Contribution Limits on the HSA
The amount that you can contribute to a HSA annually depends upon the type of HDHP coverage that you have, as well as your age. For 2021, if you only have coverage for yourself, you can contribute up to $3,600. If you have the family coverage, you can contribute up to $7,200. You are considered to be eligible for the maximum contribution if you were eligible to make a contribution to your HSA on the first day of the last month of the calendar year, regardless of whether you were eligible in prior months (this is known as the last month rule).
If you are at or above age 55 at any time during the tax year, you are eligible to contribute an extra $1,000. You can also make contributions to your HSA for a particular tax year up to April 15 of the following year (no extensions allowed).
For any month that you do not have your HDHP in place, the maximum contribution is reduced by 1/12. In addition to that reduction, the maximum amount that can be contributed to an HSA must be reduced by any:
- amounts contributed to an Archer MSA (including employer contributions; and
- any amounts that your employer contributed to an HSA on your behalf that were excluded from your gross income.
If you have more than one HSA, your total contributions to all HSAs in any given year cannot be more than the annual limit. If you make contributions to one or more HSAs that are more than the annual limit, the excess will be included in your gross income and could be subject to a 6% excise tax.
The Impact of Marriage (well, one of them)
If either spouse has family coverage, both spouses are treated as having family coverage. If both spouses have family coverage, you are treated as having family coverage with the lower annual deductible of the two plans. The contribution limit is split evenly between the two of you by default – but different division amounts can be agreed upon as you see fit.
If both spouses are age 55 or better by the end of the tax year, each spouse can contribute the additional amount to his or her HSA. For 2021, this would increase your maximum contribution limit for family coverage to $9,200.
Account Setup and Administration
You set up the HSA much the same as an IRA – you choose the financial institution (bank, insurance company, etc.) that you’d like to be your trustee, and simply open the account.
Rollovers can be done into your HSA from another HSA, an Archer MSA, or an IRA. The IRA rollover is a one-time provision that was started with the passage of the Health Care Act of 2006. In addition to the IRA rollover, the Health Care Act of 2006 also introduced the one-time rollover from a Flex-Spending Account (through tax year 2011) of one year’s HSA contribution amount, as long as you had at least that amount in your FSA prior to September 21, 2006. For more information on the tax-free transfer from your IRA, see this article.
Distributions from your HSA
You can take distributions from your HSA to pay for or reimburse yourself for qualified medical expenses. Qualified medical expenses are generally any medical expense that could otherwise be deducted when itemizing your deductions on your tax return (specified in IRC §213). These distributions will be tax-free to you. So, during the year, as you are paying for the expenses that make up the deductible amount for your HDHP, you could either take a withdrawal and pay the expense directly, or pay it yourself and reimburse yourself from the HSA.
The fantastic benefit of an HSA, in this writer’s opinion, is that the qualified expenses that you pay (or reimburse yourself for) are only limited by having been incurred after you’ve initially started making HSA contributions.
For example, let’s say you started an HSA at age 50. Instead of paying current medical expenses from the HSA, you tracked all of your medical expenses through the years (qualified expenses, not otherwise reimbursed by insurance or other means). This allows the HSA to grow over time – much the same as an IRA or other tax-deferral account. Then at some point in the far off future, you can take a completely tax-free distribution from the HSA in an amount covering those otherwise non-reimbursed medical expenses that you tracked. Truly tax-free, and it was tax-deducted in the beginning. Big win-win!
Any amounts that you withdraw for other reasons beyond paying for or reimbursing yourself for qualified medical expenses will be subject to ordinary income tax and a 10% penalty (just like an IRA).