Bundle Up This Winter with an HSA Account and a Tax Deduction / How An HSA Can Work For You

Joel Yoder for REA Associates writes: With Dec. 31 at our doorstep, are you looking for a quick and easy way to avoid some taxes? At the end of the year, there is always a rush to find those extra deductions to take advantage of, and a health savings account (HSA) has been a tried and true method of doing just that. An HSA allows a participant to:

• Keep their own money
• Earn interest – tax-free
• Save money that would have been used for medical expenses
• Get a tax deduction just for putting money into their own account.

Here are a few items and resources you need to know to unravel the mystery of an HSA:

• What is an HSA?
  An HSA is an account established exclusively for paying unreimbursed qualified medical expenses.
  
• Am I eligible for an HSA?
  To participate in an HSA, you must be covered by a high-deductible health plan (HDHP). You must also not be eligible for Medicare.

• What qualifies as a HDHP?In 2013, the deductible must be at least $1,250 for self-coverage. If you have family coverage, your annual deductible must be at least $2,500. The annual limits on total out-of-pocket costs are $6,250 for single and $12,500 for family.

• How much can I contribute to an HSA, and defer from taxes?For 2013, the maximum contribution is $3,250 for single and $6,450 for family. For participants 55 or older, the annual contribution limit goes up by $1,000.   

• When do I have to contribute to my HSA?Contributions can be made in one or more payments and at any time before the due date (without extensions) for filing the eligible individual’s tax return. The contribution window for you to make an HSA contribution for 2013 is Jan. 1, 2013 – April 15, 2014.  

• Can I get the money for things other than qualified medical expenses?Yes; however, there is 20 percent penalty if a distribution is taken prior to the participant reaching age 65. The distribution is also taxable at the participants’ marginal income tax rate. 

• How are HSA contributions deferred from taxes?
  
  
  • If you’re an employee: This can be done in one of two ways. First, your employer may withhold the contribution from your paycheck and in turn the contribution is not included in income on Form W2. Secondly, contributions can be made outside of payroll, in which case they are deducted on your tax return.
    
  • If you’re a sole proprietor: Contributions are made outside of payroll and deducted on your tax return
    
  • If you’re a partner in a partnership: There are two ways a partnership can handle HSA contributions. The partnership may either give a tax-free distribution (not deductible to the partnership) to the partner or include the amount as a guaranteed payment (deductible by the partnership, but the partner would owe self-employment tax). Then the amount is contributed to the HSA and deducted on the partner’s tax return.
    
  • If you’re a shareholder/employee in an S-corporation: There are two ways an S-corporation can handle HSA contributions. They may either give a tax-free distribution (not deductible by the S-corporation) to the shareholder or include the amount in wages (deductible by the S-corporation). Then the amount is contributed to the HSA and deducted on the shareholder’s tax return.

If you’re interested in learning more about setting up an HSA account, you should get in touch with your financial advisor or insurance agency that sets up the account. You can also consult IRS Notice 2008-59 or IRS Publication 969.