A Health Savings Account (HSA) is a type of savings account that allows you to set aside money to pay for qualified medical expenses. HSA users set aside this money on a pre-tax basis to pay for deductibles, copayments, and other expenses. Many HSA owners utilize their HSA as a way to save money for retirement. A “self-directed” HSA allows the account owner to have control over the investments including alternative assets such as REITs, private placements, LLCs, as well as public stocks, bonds and mutual funds.
An HSA can only be established if you are covered by a High Deductible Health Plan (HDHP) as of the first day of the month and are not covered by a non-HDHP health plan. You cannot be enrolled in Medicare or claimed as a dependent on another person’s tax return.
A high deductible health plan (HDHP) is a health insurance plan that typically charges lower premiums than traditional full-coverage health insurance, but requires a higher deductible (the amount of medical expenses the individual must pay out-of-pocket before insurance will cover expenses). Individuals covered by an HDHP may save in an HSA to help pay for the medical expenses incurred before the insurance covers their expenses.
To be paired with an HSA, an HDHP must contain certain limits. It cannot cover medical expenses (with exceptions for preventive care and certain other limited coverage) until at least the minimum deductible has been reached, and must limit the amount of out-of-pocket expenses that the individual must pay.
To establish a health savings account, you must sign an HSA plan agreement with an HSA custodian. Trust companies, banks, life insurance companies and other financial institutions like Mainstar Trust can act as an HSA custodian. The HSA custodian will provide you with a copy of the HSA custodial agreement that explains the health savings account rules.
HSA owners should think about how often they expect to use the HSA when determining the how to invest the contributions. An HSA can invest in the same type of investment options permitted in an IRA, but not all HSA programs offer a broad range of investment options. Many limit the possible investments to mutual funds or money markets. HSAs with frequent withdrawals typically invest in these liquid assets. Mainstar HSAs invest in those and other public investments, as well as alternative investments such as private placements, LLCs, REITs and BDCs. A Mainstar HSA is typically used as a savings vehicle for retirement expenses.
You can establish a health savings account at any time you are able to contribute. If you want to make an annual contribution for this year, you have until your tax return deadline, generally April 15 of next year, to establish the HSA and make the contribution.
In addition to the contributions, you make as the HSA owner; some employers also choose to make HSA contributions to their employees’ HSAs. You may take a tax deduction for any HSA contribution you make to your HSA. HSA contributions made by your employer are deductible by your employer.
The maximum contribution allowed each year depends on the type of HDHP coverage you have, your age, and how many months during the calendar year you are eligible to contribute to an HSA. HSA contributions made by your employer count towards your annual limit.
If you are eligible for all 12 months of the year and have self-only coverage:
Contribution limit for 2018 – $3,450
Contribution limit for 2019 – $3,500
If you are eligible for all 12 months of the year and have family coverage:
Contribution limit for 2018 – $6,900
Contribution limit for 2019 – $7,000
If you are age 55 or older, you may also make a catch-up contribution of $1,000 per year.
If you are HSA-eligible for only a portion of the year, you must prorate your contribution limit for the number of months you are eligible. For example, if you were covered by an HDHP for 4 months of the year, you may contribute 4/12 of the maximum contribution limit for the type of coverage you had.
You are not required to make an HSA contribution each year and you can vary the amount you choose to contribute each year.
If you contribute more to your HSA than you are eligible for in a year, you generally have an excess contribution. Excess contribution are not deductible and must be corrected. To correct the excess, you must remove the excess contribution plus and related investment earnings by your tax return due date, including extensions. Only the earnings are taxable if the excess contribution is removed timely. If an excess contribution is not removed, a 6% penalty applies for each year the excess remains in the HSA
You may directly transfer assets from your HSA to another or from an Archer Medical Savings Account (MSA) to an HSA. You may also take a distribution from your MSA and HSA accounts and roll these distributions to an HSA. Rollovers must be completed within 60 days and only one rollover is allowed in a 12-month period.
You can withdraw money (take a distribution) from your HSA at any time for any purpose. A distribution that is used to pay for unreimbursed qualified medical expenses is tax-free—even if you, your spouse or your dependent who incurred the expense is no longer covered by the HDHP or is not an HSA-eligible individual. See IRS Publication, 502, Medical and Dental Expenses, for a list of qualified medical expenses (www.irs.gov).
If the money is used for an ineligible expense (whether medical or non-medical), the expenditure will be taxed and, for individuals who are not disabled or over age 65, subject to a 20% tax penalty. The 20% tax does not apply to distributions made after your death, disability, or attainment of age 65. This means that you may build up your HSA balance to help pay for medical expenses in retirement, and if you want to use the money for other things after age 65, you may take distributions without the additional 20% tax.
Each HSA provider has different procedures for handling withdrawals. It is important to understand your expected distribution frequency when choosing the provider, as well as the investments. If you plan to make frequent withdrawals, a provider offering a debit card may be a good fit. If you plan to use your HSA as a savings vehicle, a provider with a wider range of investment options like Mainstar may be desirable.
Any remaining balance in your HSA will become the property of your named beneficiary when you die. If your spouse is your beneficiary, the HSA will be treated as your spouse’s own HSA. If someone other than your spouse is the beneficiary, the HSA stops being an HSA as of the date of death. The beneficiary must include the fair market value of the assets in their taxable income for the year. Death distributions are not subject to the additional 20% tax.
Please note: The intent of a Mainstar Trust HSA is as a retirement savings account. Debit cards are not used for withdrawals.