What is a Health Savings Account?
A Health Savings Account (HSA) is a tax-advantaged medical savings account you can contribute to and draw money from for certain medical expenses tax-free. HSAs can be used for out-of-pocket medical, dental, and vision. HSAs can’t be used to pay health insurance premiums. HSA’s can only be used with “High Deductible Health Plans” that count as “Minimum Essential Coverage (MEC).” Not every plan with a high deductible is HSA compatible, so make sure to double check the specifics before signing your annual health insurance contact.
HSA’s can reduce AGI / MAGI to increase cost assistance eligibility levels and lower taxable income. If you invest money in an HSA, that money grows tax-free as well. HSA’s can be withdrawn from for non-medical use at a penalty, and investment portions of HSAs can involve the same risks as any other investment account.
We cover everything you need to know about HSA’s under the ACA below. First here is a quick chart for pairing Health Savings Accounts (HSAs) with High Deductible Health Plans (HDHPs) 2017 plans (plans that will be active in 2017):
Minimums, Maximums, and Limits for 2018 HSAs
The 2017 HSA chart below shows important criteria for individuals and families. First, you’ll find the minimum deductible, which is the minimum deductible your High Deductible Health Plan must have after cost assistance. Next you’ll find the maximum out-of-pocket limit (the maximum out-of-pocket limit your HDHP can have; note that all ACA-compliant plans that are HSA eligible meet this criteria even though the general 2017 maximum limit is slightly higher). Lastly, the chart shows your contribution limit, which is the total you can contribute in 2017; those 55 or older can contribute an extra $1,000.
|2018||Minimum Deductible||Maximum Out-of-Pocket||Contribution Limit||55+ Contribution|
FACT: HSA’s aren’t “use it or lose it” they are tax-free in, keep it, invest it, use it tax-free for medical expenses, withdraw whenever at a fee, and roll it over into a retirement account when you are ready for Medicare. Only FSA’s are “use it or lose it” (the kind of health savings account you get through your employer).
Health Savings Account Limits Summary
- For 2018 a Health Savings Account can be paired with any plan with an annual deductible of more than $1,350 for self-only coverage or $2,700 for family coverage, AKA any High Deductible Health Plan (HDHP).
- For 2018 HSA annual contribution limits are $3,450 for an individual and $6,900 for a family. 55 and older can contribute an extra $1,000. Limits subject to change each year.
- For 2017 a Health Savings Account can be paired with any plan with an annual deductible of more than $1,300 for self-only coverage or $2,600 for family coverage (the same was true for 2015 and 2016).
- For 2017 HSA annual contribution limits are $3,400 for an individual and $6,750 for a family. 55 and older can contribute an extra $1,000. Limits subject to change each year.
- For 2016 HSA annual contribution limits were $3,350 for an individual and $6,750 for a family. 55 and older can contribute an extra $1,000.
- For 2015 HSA annual contribution limits were $3,350 for an individual and $6,650 for a family. 55 and older can contribute an extra $1,000.
- If you have funded your medical savings account you’ll want to fill out Form 8889, Health Savings Account (HSA) to claim your deduction.
- HSAs can affect MAGI and can pair with a High Deductible Plan (HDHP) to increase cost assistance amounts by lowering MAGI income.
- Don’t get confused, HDHP maximum requirements don’t change on a yearly basis, but out-of-pocket maximums do.
Health Savings Accounts and High Deductible Plans
HSAs pair with high deductible plans (HDHP) only, as long as you hold an HSA eligible high deductible plan you can contribute tax-advantaged dollars to the account up to the annual limit. If you stop holding a high deductible plan, then you can keep and use the money but can’t continue to contribute. Other limits apply, so see below to get all the details on HSAs including how to save big money with Health Savings Accounts and how the ACA changes medical savings accounts.
ADVICE: ObamaCare plans pair well with Health Savings Accounts. HSAs can be used to lower your MAGI and qualify for better cost assistance on the Health Insurance Marketplace. An HSA paired with out-of-pocket costs assistance on Silver plans purchased through the Marketplace makes high deductible Silver plans very attractive.
Health Savings Account Benefits Overview
All funds you put in your HSA are 100% tax deductible from gross income and can be used tax-free to pay for out-of-pocket medical expenses, including dental and vision. There are limits to the amount of money you can put in tax-free and the amount of money you can use tax-free as well. Funds roll over year to year and can be used with Medicare after retirement. If you want to take money out of the account for non-medical reasons you must pay the appropriate income taxes and a 20% penalty.
HSA’s have these benefits and more:
- HSA’s can lower your tax bracket meaning some people will pay up to 10% less in taxes by funding their HSA each year.
- HSA’s can lower your MAGI meaning some people will qualify for more tax credits and cost-sharing reduction subsidies on Silver plans only by funding their HSA each year.
- HSA’s allow you to pay out-of-pocket costs tax-free. Often the deductible on your plan will equal the max contribution to your HSA. You pay your share of the health insurance costs tax-free. If you crunch the numbers, it’s the cheapest way to get health coverage (even without cost assistance or dropping a tax bracket).
- For non-healthcare purposes, HSA’s can be withdrawn from early at a 20% penalty, rolled over into a retirement account, or be withdrawn from without penalty at 65. You can also use the money for long-term care.
- There is no “lose it or use it” rule. You can keep your HSA money, invest it, roll it over to another savings account, and more. Even if you stop funding it, you keep the money.
HSAs, FSAs, and MSAs
Other Medical Savings Accounts include Flexible Spending Accounts (FSAs) and Archer Medical Savings Accounts (MSAs). If you fund an FSA, you can’t fund an HSA that same year. You can always use your HSA, even if you can’t fund it that year. Most of the information on this page about HSAs will apply to FSAs. The big difference is that an FSA is offered through an employer and an HSA is obtained on your own. You can have both types of savings accounts at the same time and can use them both, but can only fund one in a calendar year. MSAs are not used much anymore, but existing ones can still be funded.
Who Should Use a Health Savings Account
Anyone with a high deductible health plan (HDHP) can use a Heath Savings Account. HSAs can be used by individuals and families who buy private insurance and by employees and employers. Specifically, your plan should state that it is a High Deductible Health Plan (HDHP) and is HSA eligible.If you qualify for cost assistance on the Marketplace you can use an HSA to bring down your total Modified Adjusted Gross Income, like Health Savings Accounts, and thus qualify for more subsidies. So you may want to consider a Silver HSA eligible plan.
How to Get a Health Savings Account?
You can get a health savings account from most banks. So, for instance, you can go to Bank of America (or whatever bank you use) and say, “I want a health savings account” and they will help you to set one up.
We suggest learning about the different investment options for HSA’s and reading what the Treasury Department has to say before picking an HSA option. And remember you’ll need a high deductible health plan to qualify and you’ll need to file Form 8889 at the end of the year to claim the tax benefits.
How to File Taxes For an HSA
If you have funded your medical savings account you’ll want to fill out Form 8889, Health Savings Account (HSA) so you can deduct the correct amounts from your taxable income. Don’t forget to file this form to claim the deductions!
The Investment Part of HSAs
Be aware, like a 401k, you can invest the money you put in your HSA. For those using an HSA as a savings account, strongly consider avoiding high-risk investments and instead find lower risk investments.
Like any other tax-advantaged investment account from whole life insurance to a retirement account, you can always lose or gain money depending upon the risks you are willing to take. Typically the basic HSA investment plan will return between .05% – .1% on your money annually, you can take more risky investments, but be aware there may be additional fees and risks involved.
The money you make in an HSA can be used tax-free for qualified medical expenses, but again you risk losing this money as you’ll be tying it to the market.
HSAs Can Be Used For Many Health Expenses
HSAs can be used for nearly everything related to medical except insurance premiums, dental, or vision. The list even includes some over the counter items. The use of your HSA is relegated by Section 213 (d) of the Internal Revenue Code and more information is offered in IRS Publication 502 titled, “Medical and Dental Expenses.”
As you can imagine the list of each thing you can use your HSA for is long so see our page on “what can I use my HSA for” for more details.
HSAs and High-Deductible Plans
You can only pair an HSA with a High Deductible Health Plan (HDHP). Your plan is considered a High Deductible plan if it has an annual deductible of more than $1,300 for self-only coverage or $2,600 for family coverageThis video explains High Deductible Plans and HSAs well.
High deductible health plan. For the calendar year 2016, a “high deductible health plan” is defined under § 223(c)(2)(A) as a health plan with an annual deductible that is not less than $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,550 for self-only coverage or $13,100 for family coverage. IRS
Annual Contribution Limits 2016 and 2017 Compared
The following chart from shrm.org shows the comparison of the 2016 and 2017 HSA limits as defined by the IRS’s Revenue Procedure 2015-30, issued May 5, 2015.
Please note: The printed maximum below is the out-of-pocket maximum that applies to HSAs only. The general out-of-pocket maximum was a little higher at $6,600 for an individual and $13,200 for a family in 2015.
|Contribution and Out-of-Pocket Limits for Health Savings Accounts and High-Deductible Health Plans 2017|
|For 2016||For 2017||Change|
|HSA contribution limit
(employer + employee)
Family: no change
|HSA catch-up contributions
(age 55 or older)*
|HDHP minimum deductibles||Individual: $1,300
|Individual: no change
Family: no change
|HDHP maximum out-of-pocket
(deductibles, co-payments and other amounts, but not premiums)
|Individual: no change
Family: no change
|* Catch-up contributions can be made any time during the year in which the HSA participant turns 55.
** Unlike other limits, the HSA catch-up contribution amount is not indexed; any increase would require statutory change.
Annual Out-of-Pocket Expenses Limits for HSAs 2017
Annual out-of-pocket expenses (deductibles, copayments, and other amounts, but not premiums) cannot exceed $6,550 for self-only coverage and $13,100 for family coverage.
The annual out-of-pocket limit is almost the same as the maximum out-of-pocket limits for all 2017 plans. Once you reach your plan’s out-of-pocket maximum, your insurer covers 100% of your costs.
You can pay all of your out-of-pocket expenses for the year on even the highest deductible plan tax-free using an HSA if you have enough money in your HSA. You cannot fund dental and vision. Remember that you can only put in about half of that a year, so you’d have to have funds rolled over from other years.
Annual Contribution Limits for HSAs 2015
Each year you can contribute dollars tax-free to your HSA up to a certain limit. The annual contribution limit for your HSA is $3,350 for an individual and $6,650 for a family.
HSA holders 55 and older can contribute an extra $1,000 tax deductible dollars to their HSA, $4,350 for an individual and $7,650 for a family.
NOTE: you can contribute as much as you want to your HSA, but only contributions up to the limit will be deductible from your gross income!
|2015||Minimum Deductible||Maximum Out-of-Pocket||Contribution Limit||55+ Contribution|
Annual contribution limitation. For the calendar year 2015, the annual limitation on deductions under § 223(b)(2)(A) for an individual with self-only coverage under a high deductible health plan is $3,350. For the calendar year 2015, the annual limitation on deductions under § 223(b)(2)(B) for an individual with family coverage under a high deductible health plan is $6,650. IRS
Annual Contribution Limits for HSAs 2016
For 2016 annual contribution limit for your HSA is $3,350 for an individual and $6,750 for a family (family limit increased $100).
HSA holders 55 and older can contribute an extra $1,000 tax deductible dollars to their HSA, $4,350 for an individual and $7,750 for a family.
NOTE: you can contribute as much as you want to your HSA, but only contributions up to the limit will be deductible from your gross income!
|2016||Minimum Deductible||Maximum Out-of-Pocket||Contribution Limit||55+ Contribution|
Annual contribution limitation. For the calendar year 2016, the annual limitation on deductions under § 223(b)(2)(A) for an individual with self-only coverage under a high deductible health plan is $3,350. For the calendar year 2016, the annual limitation on deductions under § 223(b)(2)(B) for an individual with family coverage under a high deductible health plan is $6,750. IRS
How ObamaCare Changes Medical Savings Accounts
There are some changes to medical saving account limits and deductions under the Affordable Care Act.
Medicine Cabinet Tax
Over the counter medicines no longer qualified as medical expenses for flexible spending accounts (FSAs), health reimbursement arrangements (HRAs), health savings accounts (HSAs), and Archer Medical Saving accounts (MSAs).
Additional Tax on HSA/MSA Distributions
Health savings account or an Archer medical savings account, penalties for spending money on non-qualified medical expenses. 10% to 20% in the case of an HSA and from 15% to 20% in the case of an MSA.
Flexible Spending Account Cap 2013
Contributions to FSAs are reduced to $2,500 from $5,000.
Medical Deduction Threshold tax increase 2013
The threshold to deduct medical expenses as an itemized deduction increased to 10% from 7.5%.
HSAs and Tax Benefits
HSAs allow you to set aside tax-free dollars to pay for routine, out-of-pocket health expenses. You also pay no federal taxes on interest earned by your HSA as long as you use the money to pay for eligible medical expenses, as defined by the IRS. Dental & vision are included.
Not only can you pay for care tax-free, but an HSA can also lower your tax bracket (reducing the amount you pay in taxes by up to 10% depending upon your income and qualify you for more cost assistance. Since many HSA qualified plans are “silver plans on the Marketplace,” people can use this to adjust the cost sharing reduction (CSR) level of their plan and qualify for more cost sharing reduction subsidies.
Without going into detailed Math, the HSA’s and Silver plans works out to the best value plan anyone can get when tax advantages are taken into consideration.
|Table 1. 2015 Taxable Income Brackets and Rates|
|Rate||Single Filers||Married Joint Filers||Head of Household Filers|
|$0 to $9,225||$0 to $18,450||$0 to $13,150|
|$9,225 to $37,450||$18,450 to $74,900||$13,150 to $50,200|
|$37,450 to $90,750||$74,900 to $151,200||$50,200 to $129,600|
|$90,750 to $189,300||$151,200 to $230,450||$129,600 to $209,850|
|$189,300 to $411,500||$230,450 to $411,500||$209,850 to $411,500|
|$411,500 to $413,200||$411,500 to $464,850||$411,500 to $439,000|
Reporting Health Savings Account Information on Tax Returns
Can I Take Money Out of my HSA?
You can take up to your annual out-of-pocket limit out each year to pay for medical expenses. If you want to take money out for something else, you will pay a 20% penalty in addition to it being taxed.
Unlike an FSA, HSA funds roll over annually & accumulate, even if an employee changes jobs. The accumulated funds can be removed for non-eligible expenses, but then will be subject Federal Income Tax and 20% penalty. Once an individual qualifies for Medicare, these accumulated funds can still be used tax-free for medical expenses Medicare doesn’t cover or can be used like an IRA or 401k (however you’ll still have to pay taxes on this, but no penalty). In addition, should a person decide they no longer want to use a high-deductible health plan, these funds can usually be rolled into an IRA retirement account without facing taxes.
Two Different Out-of-Pocket Maximums
HSA’s have had a slightly different out-of-pocket maximum (OOP maximum) for HSA eligible and non-HSA eligible plans since 2015.
The OOP maximum limits for HDHPs are governed by the indexing required in the Internal Revenue Code, while the indexing for general OOP maximum limits is determined by the Department of Health and Human Services. The HHS one is always higher; this allows for some non-HSA eligible HDHPs to be sold. So double check that your plan is HSA eligible.
Other Types of Health Savings Accounts
Aside from HSAs, which most folks will use who choose to use a medical savings account, there are also Flexible Spending Accounts (FSAs) and on some grandfathered plans Archer Medical Savings Accounts (MSAs).
FSA Flexible Spending Account. FSAs are set up through an employer plan & they allow you to set aside pre-tax dollars for certain health and dependent-care needs. For example, the money can be used to pay for deductibles, prescription co-pays and other treatments not covered by your insurance. A big downside for many: whatever you don’t use by the end of your company’s benefits year will be forfeited. Check with your employer’s Human Resources department for specifics on their FSA. They can provide a list of FSA-qualified costs that you can purchase directly or can collect reimbursement. A few common FSA-qualified costs include:
- Copays for medical treatments & doctor visits,
- Hospital & Doctor fees for medical tests & services like X-rays & cancer screenings.
- Physical Rehabilitation.
- Dental & Orthodontic expenses like cleanings, fillings, or braces.
- Inpatient treatment for alcohol or drug addiction
- Vaccines or immunizations & flu shots.
MSA “Archer” Medical Savings Account.The Archer MSA was intended to be used by self-employed individuals & small businesses with fewer than 50 employees. The plan is entirely self-directed, including its initial setup & compliance with the plan thresholds. It works very closely to HSAs & has been replaced by HSAs since 2007. However, some grandfathered plans may still use MSAs that have been “left open.”
History of HSAs
Health Savings Accounts (HSAs) were created in 2003 so that individuals covered by high-deductible health plans could receive tax-preferred treatment of money saved for medical expenses. An adult who is covered by a high-deductible health plan and has no other first-dollar coverage may establish an HSA.
- Instructions for Form 8889, Health Savings Accounts
- Health Savings Accounts and Other Tax-Favored Health Plans – IRS publication 969, complete instructions. It includes what is new, qualified medical expenses, qualifying for plans and benefits, contributions, distributions, balances, the death of an account holder, forms required, and more.
HSA Adjusted Amounts (Parameters) for Each Year (annual contribution limitation)