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A health savings account (HSA) is a popular type of tax-advantaged medical savings account available to individuals who are enrolled in high deductible health plans (HDHPs). Individuals can use their HSAs to pay for expenses that are covered under the HDHP until their deductible has been met, or they can use their HSAs to pay for qualified medical expenses that are not covered under the HDHP, such as dental or vision expenses.
HSAs provide a triple tax advantage—contributions, investment earnings and amounts distributed for qualified medical expenses are all exempt from federal income tax, Social Security/Medicare tax and most state income taxes. Due to an HSA’s potential tax savings, federal tax law includes strict rules for HSAs, including limits on annual contributions and HDHP cost sharing.
This Compliance Overview summarizes key features for HSAs, including the contribution limits for 2018.
HSA Key Features
|Account Description||Tax-exempt trust or custodial account established by an eligible individual to pay for qualified medical expenses.|
|Important Reminders for 2018||New annual limits on contributions apply.|
|Potential Tax Benefits for Employees||
|Who May Participate||An individual is eligible to establish and contribute to an HSA if he or she:
|HDHP Coverage Required||Yes. For 2018, the minimum annual deductible is $1,350 for self-only coverage or $2,700 for family coverage. The maximum deductible and other out-of-pocket expenses (excluding premiums) is $6,650 for self-only coverage or $13,300 for family coverage.
+ Non-grandfathered HDHPs must also apply the self-only cost-sharing limit for coverage of essential health benefits provided in network ($7,350 in 2018) to each individual covered under the plan, even if this amount is below the family deductible limit.
Note: A health plan that provides certain preventive health services without a deductible, as required by the Affordable Care Act, may still qualify as an HDHP.
|Who May Contribute||The employee, the employer, or both may contribute (family members or any other person may also contribute).|
|Pre-tax Employee Contribution Allowed||Yes, contributions can be made through employee salary reductions under a cafeteria plan.|
|Limit on Contributions||Yes. For 2018, the maximum contribution is $3,450 for self-only coverage or $6,850 for family coverage. The limit is increased by $1,000 for eligible individuals age 55 or older at the end of the tax year.|
|Employer Participation||Employer contributions made through a cafeteria plan are subject to the Section 125 nondiscrimination requirements. All other employer contributions are subject to the “comparability rules,” meaning that the employer must make comparable contributions to all comparable participating employees’ HSAs.|
|Distributions Allowed||Distributions used exclusively to pay for qualified medical expenses of the employee and his or her spouse and dependents are tax-free.
Any distribution amount not used exclusively to pay for qualified medical expenses is included in the employee’s gross income and may be subject to an additional 20 percent tax.
Note: Employees who cover dependents to age 26 under an HDHP may not use HSA funds for reimbursement on a tax-free basis for an adult child’s medical expenses, unless the adult child qualifies as a tax dependent of the employee.
|Timing of Distributions||An employee may receive distributions from an HSA at any time for qualified medical expenses not reimbursed by the HDHP; however, expenses incurred before an HSA is established are not considered qualified medical expenses.
Employees do not need to meet the HSA eligibility criteria in order to receive a tax-free distribution from their HSAs. Also, an employee’s spouse and dependents do not have to be HSA-eligible in order to have their qualifying medical expenses reimbursed on a tax-free basis.
|Qualified Medical Expenses||Generally, qualified medical expenses are those expenses paid for “medical care” as defined in Internal Revenue Code Section 213(d). Health insurance premiums are generally not considered qualified medical expenses for HSA purposes, unless the premiums are for:
|Balance and Carryover||Amounts remaining in an HSA at the end of the year are generally carried over to the next year.|
|Account Subject to COBRA||No.|
|Portability||Yes, the employee is the owner of the account.|
Interested in implementing an HSA for your employees? Contact The Safegard Group, Inc.