Friday, March 30, 2012

Health Savings Accounts or HSAs

In my last blog, I explained how and when medical expenses are deductible.  I didn't get to the Health Savings Account, or HSA.  HSAs are special accounts that get favorable tax treatment for these funds set aside for medical expenses.  My advice:  if you have an HSA, USE IT.  Fund it as much as you can, and take advantage of this great tax deduction.

In my experience, HSAs underused.  I think a lot of people don't really understand what they are and how much they can really benefit from them.

Why use an HSA?  All of the hurdles and pitfalls of deducting medical expenses are avoided if you have this account.  Basically, you get an above-the-line deduction for funding your HSA. You don't have to itemize. You don't have to meet any 7.5% floor.  You don't even have to be sick or have medical expenses. You get the deduction when you put the money into the account, not when you spend it. The only catch is that if you take a distribution NOT for medical expenses, that part of the distribution is subject to a 20% penalty. Keep good records in case the IRS questions you.

How do I get an HSA?  First, you must have a medical plan that allows an HSA. These must be high-deductible plans, with a minimum deductible of $1200 for single coverage and $2400 for family coverage. Check with your benefits provider to be sure your plan qualifies.  Then you can open your HSA at most banks; some plans may prefer a specific account holder.

How do I fund my HSA?  Just make a deposit!  Most of the HSA holders I see only have it because their employer set it up and contributes to it.  Employers can save so much on the premiums, they will contribute a small amount to the employee's HSA. These employees are perhaps not fully taking advantate of the HSA.  Even if your employer contributes, you can also contribute up to the limit ($6250 in 2012 for family coverage).  It's not a "use it or lose it" plan.  Any unused portion stays in the account earning interest, until you need it for medical expenses. This is a key difference from the old Flexible Spending Accounts many employers offer (which are very good plans if you can't have an HSA).

How do I get the money out of the HSA?  Your account is generally just a checking account.  Some plans/accounts will provide debit card to use for purchases. Any time you have a medical expense, use that account to pay.  But what happens if you don't have that checkbook with you?  Or if you have mixed purchases at a store; I may buy Clif Bars with my prescription at Target. Or I may want to use my credit card to pay the Cleveland Clinic so I can earn reward points. That's okay. What I do is keep track of all my expenses and periodically reimburse myself for the medical expenses I paid outside my HSA. I have all the receipts to justify every payment from the HSA.

How do I report the HSA on my tax return? Form 8889 is needed ( and instructions at  At tax time, you will receive a two statements; a 1099SA reporting your distributions from the HSA, and a 5498-SA, reporting how much went in to the HSA. Report the contributions in Part I and distributions in Part II.

for a list of qualified medical expenses.  You can use HSA funds for things not covered by your plan; co-pays, co-insurance, eye glasses, orthodontia, excess chiropractor visits, etc.

1 comment:

  1. Your account is generally just a checking account Some plans accounts will provide debit card to use for purchases Any time you have a medical expense. Matawan income tax preparation services