What is an HSA?

As Health Savings Accounts (HSA) become more popular, you may ask the question, “what is an HSA?” An HSA is a health account that is used for qualified medical expenses. Common examples of qualified medical expenses include dental care, glasses, prescription medication, insulin, and so forth. As such, qualified medical expenses generally do not include health insurance premiums or reimbursed expenses.

For example, Bob has surgery that costs $4,000. He withdraws $4,000 from his HSA to pay for his surgery. However, his employer reimburses $1,500 of the costs. Thus, Bob would only have $2,500 in qualified medical expenses.

HSA Qualifications

There are a few requirements from the IRS to qualify for an HSA:

  • You must be covered under a high-deductible health plan (HDHP) on the first day of the month. For 2023, the HDHP minimum annual deductible for single coverage is $1,500 and for family coverage is $3,000. For 2023, the maximum annual deductible for single coverage is $7,500 and $15,000 for family coverage.
  • The HDHP must be the only form of health insurance coverage with some limited exceptions. These exceptions include a specific illness or disease, disability, and long-term care coverage.
  • You must not be currently enrolled in Medicare. This includes both Medicare Part A and Part B.
  • You should not be claimed on someone else’s 2022 tax return as a dependent.

Benefits of an HSA  

An HSA has been referenced by some as an “IRA on steroids.” How is a health account used for qualified medical expenses referenced as such? The HSA offers a “triple-tax-free” benefit.

  1. Contributions may be 100% tax deductible. This means that contributions made towards an HSA will lower your gross income subject to taxation for the tax year.
  2. HSA’s grow tax-free. This means that there can be growth in an HSA account that will not be subject to tax.
  3. HSA distributions are not taxed so long as they are used for qualified medical expenses.

One more additional benefit is that amounts left in an HSA at year-can be carried forward into the next year.

Another benefit that is often overlooked is that out-of-pocket medical expenses incurred after establishing an HSA may be reimbursed from the HSA account at a later year. For example, let’s assume Bob has established an HSA account and put $3,000 in there. Let’s also assume he has a qualified medical expense in 2022 of $2,000. Of course, he could choose to just pay the $2,000 via his HSA account or he can pay this expense out-of-pocket. If Bob pays the expense out-of-pocket then he can reimburse himself for the expense in a later year. Thus allowing the funds to grow tax-free and allowing Bob to receive the distribution tax-free.

A few requirements that Bob should keep in mind when considering this option are:

  1. The distributions received must be reimbursed for qualified medical expenses.
  2. Qualified medical expenses must not have been reimbursed from another source such as an employer.
  3. Medical expenses must not have been taken as an itemized deduction.
  4. Must keep receipts for the qualified medical expenses reimbursed.

2023 HSA Contribution Limitations

There are of course limitations to HSA contributions. For 2023, the maximum contribution for an individual is $3,850 and is $7,750 for a family. There are also $1,000 catch-up contributions for individuals 55 and over until they reach age 65 or enroll in Medicare.

An HSA is a great tax tool that offers many benefits. Of course, you must meet the requirements from the IRS to qualify for an HSA – most notably, you must be enrolled in a HDHP. As such, it is best to consult your KT advisor to see if an HSA is the right decision for you.