• Casey Thomas-Hardesty

What is an HSA and Why You Need One

Updated: Jan 31, 2019

How can I pay for this? That's a question I feel like I get weekly when talking to women about their OBGYN, hospital, or physical therapy visits. Let's face it; healthcare is expensive. While many more individuals may be eligible for health insurance now, your premiums are likely high and your deductible even higher.

Healthcare Savings Accounts, or HSAs, are one way to help you better manage those rising costs. I reached out to Nicole Payton, CPA and Senior Manager at BKD CPAs & Advisors to help get a better explanation of what an HSA is and what it can do for you.


What is a Health Savings Account?

A Health Savings Account (HSA) is a tax-exempt custodial account established solely for the purpose of paying unreimbursed qualified medical expenses.


How do I know if I qualify for an HSA?

You qualify to establish an HSA if you are a participant covered under a high-deductible health plan and are not eligible to be claimed as a dependent on another person’s federal income tax return for the year in question. However, in the month an individual becomes eligible for Medicare (age 65 under current law) and subsequently thereafter, no HSA contributions are allowed.


What is the benefit of using an HSA?

HSA contributions are tax deductible adjustments to gross income. An individual does not need to itemize deductions in order to receive a tax benefit from making HSA contributions. Additionally, any contributions made to the account that are not distributed are carried over to future years until used. While there are limits to the amount that can be contributed in a given year, there are no limits on the amount that can roll over to future years. Finally, any interest or other earnings on the balance of the account are tax-free.

Where can I get an HSA?

Many employers that offer high-deductible health plans also contract with a specific trustee to maintain the employee Health Savings Accounts. If you are contributing to an HSA via salary deferral, the trustee will likely be chosen for you by your employer. If you are not contributing via salary deferrals or you are making after-tax contributions, you can open an HSA with any authorized trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone approved by the IRS to be a trustee of IRAs or Archer MSAs, and a quick google search will provide a multitude of options.


I don't have the option to put money in my HSA pre-tax. Is there still an advantage to contributing to my HSA?

Yes! Whether you contribute to your HSA via salary deferrals or you contribute to your HSA with after-tax dollars, the income tax benefit is still the same. If contributing via salary deferrals, the amount of taxable wages reported to you on your W-2 will be reduced to reflect the contributions resulting in a lower amount of income to report on your income tax return. If you contribute with after-tax dollars, you will file Form 8889 with your income tax return to claim the contribution as an adjustment (reduction) to gross income. There are limits on the amount of total contributions that can be made to your HSA in a given year which include any combination of salary deferrals, after-tax dollar contributions, and employer contributions. For individuals with self-only coverage, that limit for 2019 is generally $3,500 ($3,450 for 2018), and for those with family coverage the limit is generally $7,000 for 2019 ($6,900 for 2018).

I didn't contribute my max in 2018. Is it too late to make a contribution?

No! Contributions can be made to an HSA up until the filing deadline for that tax year without regards to extensions. You have until April 15, 2019 to make 2018 contributions and claim the deduction on your 2018 income tax return.


What can I purchase with my HSA funds?

HSA funds can be used tax-free to pay or reimburse the taxpayer for qualified medical expenses ( or HERE) of the taxpayer, spouse, or dependents incurred after the HSA has been established. Qualified medical expenses generally include unreimbursed expenses for doctors, dentists, hospitals and medicines for which a prescription is required or has been written. Note that an itemized deduction cannot be taken for qualified medical expenses which have been paid for or reimbursed by HSA distributions.


Distributions can be made from an HSA at any time, for any reason. However, if distributions from the HSA are not used for qualified expenses, the distribution is subject to income tax, and a 20% penalty may apply if the distributions are received before the taxpayer reaches age 65.



Opinions, conclusions and other information expressed in this message are not given or endorsed by my firm or employer.

Any tax advice contained in the body of this blog was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

These discussions and conclusions are based on the facts as stated and existing authorities as of the date of this blog. Our advice could change as a result of changes in the applicable laws and regulations. We are under no obligation to update this information if such changes occur. Our advice is based on these unique questions as you communicated them to us and should not be used or relied on by anyone else.

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