A health savings account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur (those allowable for the medical expense itemized deduction). The qualified medical expenses are for the taxpayer, his or her spouse, and dependents even if they are not eligible to make contributions. If both spouses have an account, one spouse may use a distribution from his or her HSA to pay or reimburse expenses of the other spouse but both HSAs may not reimburse the same expenses. No permission or authorization from the IRS is necessary to establish an HSA. You set up an HSA with a qualified trustee which can be a bank, insurance company, or anyone already approved by the IRS to be a trustee of an IRA or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider. If you have an Archer MSA, you can generally roll it over into an HSA tax free. Contributions generally are not allowable if the taxpayer has covereage under any other health plan that does not meet the “high deductible” requirements of a high deductible health plan (HDHP) but there are exceptions.
A plan that otherwise satisfies HDHP rules may provide preventive care benefits without a deductible or with a deductible below the minimum annual deductible. Benefits may also be provided under certain types of “permitted” coverage and insurance before the deductible of the HDHP is satisfied. Pemitted coverage includes vision, dental, long-term-care, accidents and disability. Allowable insurance includes per-diem while hospitalized, spedific disease or illness, and liability for workers compensation, torts, owning and using a car or other property [J.K. Lasser’’s 2015 Your Income Tax].
Distributions to pay qualifeid medical expenses are not taxable but if withdrawals are made before age 65 and are not used for medical expenses the amounts withdrawn are taxable and an additional 20% penalty is levied on the taxable amount but it does not apply if the taxpayer is disabled or reaches age 65. After age 65, distributions not used for medical expenses ARE TAXABLE but the 20% penalty does NOT apply. Distributions do not have to be taken in the year the expenses are incurred but can be taken in the following or any future year. This may be necessary if there are insufficient funds in the account to cover medical expenses incurred. Distributions are reported in Part 11 of form 8889 and reporrted as Other Income on line 21 of form 1040. If there is a taxable distribution and no exception to the penalty applies, the 20% penalty is entered on Form 8889 and reported on line 62 of form 1040. The HSA
trustee or custodian reports the distribution on Form 1099-SA.
Balance In An HSA
An HSA is generally exempt from tax. You are permitted to take a distribution from your HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free. Amounts that remain at the end of the year are generally carried over to the next year (see Excess contributions, earlier).
Death of HSA Holder
What happens to that HSA when you die depends on whom you designate as the beneficiary. If your spouse is the designated beneficiary, it will be treated as your spouse’s HSA after your death. If your spouse is not the designated beneficiary, the account stops being an HSA, and the fair market value of the HSA becomes taxable to the beneficiary in the year in which you die. If your estate is the beneficiary, the value is included on your final income tax return.
• You can claim a tax deduction FOR AGI for contributions you, or someone other than your employer, make to your HSA. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.
• The contributions remain in your account until you use them.
• The interest or other earnings on the assets in the account are tax free.
• Distributions may be tax free if you pay qualified medical expenses.
• An HSA is “portable.” It stays with you if you change employers or leave the work force.
Qualifying for an HSA
• You must be covered under a high deductible health plan (HDHP) (described in another article) on the first day of the month.
• You have no other health coverage except what is permitted under other health coverage
• You cannot be enrolled in Medicare.
• You cannot be claimed as a dependent on someone else’s tax return.
• If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse’s coverage does not cover you.
• If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an HSA contribution. This is true even if the other person does not actually claim your exemption.
• Each spouse who is an eligible individual who wants an HSA must open a separate HSA. You cannot have a joint HSA.
If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse’s coverage does not cover you.