insurance

How to Make the Most of a Health Savings Account

Paired with a high-deductible health insurance policy, an HSA is a great way to save a tax-free stash of money for medical expenses. Most of the health care overhaul proposals in Congress would expand the use of HSAs.

Question: I’ve heard that the new health care proposals in Congress would expand the use of health savings accounts. How do these accounts work, and who qualifies for them? How would the proposals in Congress change the HSA rules?

Answer: Health savings accounts are already a great way for people with high-deductible health insurance policies to build up a tax-free stash of money for medical expenses. Your contributions are tax-deductible (or pre-tax if made through your employer), the money grows tax-deferred, and you can use it tax-free for eligible medical expenses in any year—even far into the future. Unlike flexible spending accounts, HSAs have no use-it-or-lose it requirement.

Under the current rules, you can use HSA money tax-free for out-of-pocket medical expenses, including your deductible, co-payments, prescription drugs and other medical costs that aren’t covered by your insurance, such as vision and dental care. You can also use HSA money to pay for a portion of long-term-care insurance premiums, based on your age (up to $410 in 2017 if you’re age 40 or younger; $770 if 41 to 50; $1,530 if 51 to 60; $4,090 if 61 to 70; and $5,110 if 71 or older). You can’t contribute to an HSA after you sign up for Medicare, but you can continue to use the money that was already in the account for out-of-pocket medical expenses, as well as for Medicare Part B, Part D and Medicare Advantage premiums.

You can contribute to an HSA if you have an HSA-eligible health insurance policy with a deductible of at least $1,300 if you have single coverage, or $2,600 for a family plan, whether you get your health insurance through your employer or on your own. Under the current rules, you can contribute up to $3,400 to an HSA if you have individual coverage in 2017 or $6,750 if you have family coverage, plus $1,000 if you’re 55 or older. The limits were $3,350 for individual coverage or $6,750 for family coverage for 2016—and you still have until April 18, 2017, to make your 2016 contribution if you had an HSA-eligible policy for all of last year (see You Still Have Time to Make an HSA Contribution for 2016 to calculate how much you can contribute if you had eligible coverage for only part of 2016).

Many employers offer HSAs for employees with high-deductible health plans, and some even match their contributions, but you can open an account on your own as long as you have an eligible health insurance policy. You can search for HSA administrators at HSASearch.com. Pay attention to fees and investing options—most plans have savings accounts if you are using HSA money for current expenses, but some also let you invest in mutual funds to build up money for future expenses.

Most of the health care proposals in Congress, including the American Health Care Act, would expand the use of HSAs. The AHCA would increase the allowable annual HSA contributions up to the maximum out-of-pocket spending limit for HSA-eligible health plans (that limit is currently $6,550 for individuals or $13,100 for family coverage). You’d also be able to use the money tax-free for over-the-counter drugs without a prescription (a prescription is currently required, except for insulin), and the penalty for using the money for non-medical expenses before age 65 would shrink from the current 20% to 10% (you’d still owe taxes on any withdrawals used for non-medical expenses at any age), which reverses two rules that had been changed under the Affordable Care Act. If the AHCA is passed the way it is currently written, none of these HSA changes would take effect until 2018.

The AHCA would also address a tricky rule for HSA catch-up contributions. HSA owners age 55 and older can contribute an extra $1,000 to their HSAs. But HSAs can be owned by only one person (similar to IRAs), not jointly. So if your spouse is 55 or older and is also covered by your high-deductible health insurance policy, he or she can also make a $1,000 HSA catch-up contribution but must currently open a separate HSA account to do so, says Roy Ramthun, president of HSA Consulting Services (see Making Catch-Up Contributions to a Health Savings Account for more information about this complicated rule). The AHCA would simplify the rules and let both spouses make their $1,000 catch-up contributions to the same HSA account if they are both 55 or older and are covered by the high-deductible health plan. That provision would also take effect starting in 2018 if the bill is passed.

For more information about the current HSA rules, see our FAQs About Health Savings Accounts.

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