How health savings accounts work
- An HSA is a tax-deductible savings account used in conjunction with an HSA-qualified high-deductible health plan.
- Contribution limits for 2018 are $3,450 for individuals, $6,900 for a family.
- You can buy HDHPs through a state exchange – or off-exchange.
- Transitional relief for plans that cover male contraception before the deductible
- You withdraw your HSA funds – with no taxes or penalties – to pay for qualified medical expenses.
A health savings account (HSA) is a tax-deductible savings account that’s used in conjunction with an HSA-qualified high-deductible health insurance plan (HDHP).
HSA contribution limits – yet another new adjustment for 2018
HSA regulations allow you to legally reduce federal income tax by depositing pre-tax money into a health savings account, as long as you’re covered by an HSA-qualified HDHP. In 2018, you can deposit up to $3,450 if you have HDHP coverage for just yourself, or $6,900 if you have HDHP coverage for your family.
There’s no minimum deposit, but whatever you put into your account is an “above-the-line” tax deduction that reduces your adjusted gross income. (If you make your HSA contributions via your employer – as a payroll deduction – the money will be taken out of your check before taxes, so you’ll avoid both income tax and payroll tax on the contributions.)
Just like IRAs, HSA contributions can be made until April 15 of the following year. Account holders who are 55 or older are allowed to deposit an additional $1,000 in catch-up contributions. (This amount is not adjusted for inflation; it’s always $1,000.)
Although maximum contributions are announced by the IRS several months before the start of the year, the 2018 maximum contribution for a family in was adjusted in March 2018, as a result of the Tax Cuts and Jobs Act that Congress enacted in December 2017. (See Section 11002 of the legislation, relating to the use of the chained consumer price index for determining certain inflation adjustments.) In a bulletin published in March 2018, the IRS kept the contribution limit for a single individual at $3,450, but decreased the contribution limit for a family to $6,850. It had previously been set at $6,900 for 2018.
But in April 2018, the IRS reversed course, publishing Revenue Procedure 2018-27, which resets the HSA contribution limit to $6,900 for people who have family HDHP coverage. The IRS noted that the administrative burden of adjusting the contribution limit down to $6,850 was going to end up costing more than the government would gain in additional tax revenue from the lower limit.
So people who had contributed $6,900 early in 2018, before the March bulletin was published, no longer need to withdraw $50 to avoid an excise tax for excess contributions. And those who did withdraw $50 already can put it back. Additionally, people who scheduled contributions to be made throughout the year as payroll deductions do not have to adjust their scheduled contributions.
HSA contributions can be made throughout the year, or all at once – it’s up to the account holder. If a family had already contributed $6,900 to their HSA by March 2018, they must contact their HSA administrator (or employer, if the HSA contributions are payroll deducted) and request a refund of $50. Otherwise, that $50 would be considered an excess contribution, subject to an excise tax.
The health plan that pairs with an HSA
Because the HSA is paired with a high-deductible health plan, your health insurance premiums will often be lower than they would be on a more traditional plan with a lower deductible. But HSA-qualified plans vary considerably in their out-of-pocket exposure; deductibles on HSA-qualified plans in 2018 can be as low as $1,350 for an individual and $2,700 for a family. So you’ll find them among Bronze, Silver, and sometimes Gold plans, both on and off the exchange.
But since the maximum out-of-pocket limits on HSA-qualified plans are lower than the maximum allowable out-of-pocket limits on other plans (and the difference is growing with time), there will typically be some non-HSA-qualified plans (with higher out-of-pocket exposure) that have lower premiums than the available HSA-qualified plans. So while an HSA-qualified plan will typically be among the lower-priced plans available, it won’t necessarily be the lowest-cost plan available.
Prior to 2016, it was common to see HSA qualified plans that used aggregate family out-of-pocket limits. That meant the entire family out-of-pocket limit would need to be met before the plan’s benefits kicked in, even if all the claims were for a single family member. But starting in 2016, all health plans – including HDHPs – must embed individual out-of-pocket maximums, which means that no single family member’s out-of-pocket expenses can exceed the individual out-of-pocket limit established by the ACA, even if the family is enrolled in an HDHP with a higher family out-of-pocket limit. (And this becomes more important due to the aforementioned widening gap between the upper out-of-pocket limits allowed for all plans under the ACA, versus the limit allowed for HSA-qualified plans.)
It’s important to note that you can only contribute to an HSA if your current health insurance policy is an HSA-qualified high-deductible health plan (HDHP). Not all high deductible plans are HSA-qualified, so check with your employer or your health insurance carrier if you’re unsure. Contributions to your HSA can be made by you or by your employer, and they’re yours forever – there’s no “use it or lose it” provision with HSAs, and the money rolls over from one year to the next. HSA funds can be stored in a variety of savings vehicles, including bank accounts and brokerage accounts (ie, the funds can be invested in the stock market if you prefer that option), and there are numerous HSA custodians from which to choose.
IRS provides transitional relief for HSA-qualified plans that cover vasectomies and condoms before the deductible
The IRS has clarified that while male contraception is not considered preventive care under federal regulations (and thus coverage under a plan that covers male contraception before the deductible would make a person ineligible to contribute money to an HSA), the IRS is not enforcing that provision until 2020. So if you’re in a state that has mandated that all plans cover male contraceptives before the deductible, you can still contribute to your HSA if you have a plan that would otherwise be considered HSA-qualified.
Here’s the backstory on how this all works:
You can only contribute to an HSA while you’re covered by an HSA-qualified HDHP. If you drop your health insurance coverage or switch to a non-HDHP, you have to stop making HSA contributions.
One of the requirements for a plan to be an HSA-qualified HDHP is that the plan cannot pay for any services before the deductible, other than preventive care. Preventive care was defined by the IRS in Notice 2004-50, and that was revised in 2013 by Notice 2013-57, to clarify that any services deemed preventive care under the ACA (and thus required to be covered on all non-grandfathered plans with no cost-sharing) would be considered preventive care for HSA-qualified plans as well. That ensured that plans could be both ACA-compliant and HSA-qualified.
But since then, some states – including Illinois, Maryland, and Oregon – have enacted laws requiring all state-regulated plans to cover FDA-approved contraceptives for men, before the deductible is met. Contraceptive coverage for women is considered preventive care under ACA regulations, so plans that cover female contraceptives before the deductible can still be HSA-qualified. But male contraceptives are not considered preventive care under federal regulations.
So if a state requires all state-regulated plans (ie, all plans that aren’t self-insured) to cover vasectomies and condoms at no cost — or in any form before the deductible is met — HSA-qualified plans in that state would cease to be HSA-qualified.
In Maryland, the law requiring plans to fully cover male contraception took effect in January 2018, and concerns arose quickly about the fact that people in Maryland with plans that were marketed as HSA-qualified would no longer be able to contribute to their HSAs, since their health plans were now providing pre-deductible benefits in excess of what the IRS considers preventive care. Maryland enacted legislation in April 2018 to exempt HSA-qualified plans from the law that requires plans to cover male contraception, but that wouldn’t help people who had already purchased HSA-qualified plans for 2018.
In response to the conundrum faced by people who wanted HSA-qualified coverage in states requiring male contraceptive coverage before the deductible, the IRS published Notice 2018-12. This notice clarifies that
- Male contraceptives are not considered preventive care under federal guidelines, so having a plan that covers them before the deductible would make a person ineligible to contribute to an HSA.
- The IRS is seeking comments on the preventive care rules for HDHPs, so it’s possible that IRS guidelines for allowable preventive care under an HSA-qualified plan could change in the future.
- Until the start of 2020, the IRS is going to allow people to contribute to an HSA even if their plan (which would otherwise be considered an HSA-qualified plan) covers male contraception before the deductible. This transitional relief also applies to plans that were issued before the IRS published Notice 2018-12, so a person who bought an otherwise-HSA-qualified plan for 2018 can make the full year HSA contribution for 2018.
Using your HSA funds
You can use the tax-free savings in your HSA to pay for doctor visits, hospital costs, deductibles, co-pays, prescription drugs, or any other qualified medical expenses. Once the out-of-pocket maximum on your health insurance policy is met, your health insurance plan will pay for your remaining covered medical expenses, the same as any other health plan.
If you switch to a health insurance policy that’s not HSA-qualified, you’ll no longer be able to contribute to your HSA, but you’ll still be able to take money out of your HSA at any time in your life to pay for qualified medical expenses, with no taxes or penalties assessed. If you don’t use the money for medical expenses and still have funds available after age 65, you can withdraw them for non-medical purposes with no penalties, although income tax would be assessed at that point, with the HSA functioning much like a traditional IRA.
You can also withdraw tax-free money from your HSA to pay Medicare premiums (for Part A, if you have to pay premiums for it – although most people don’t – and for Parts B and D, but not for Medigap plans). Tax-free HSA funds can also be used to pay long-term care premiums. There are limits on how much you can withdraw tax-free from your HSA to pay long-term care insurance premiums. (These limits are for 2018; the IRS indexes them for inflation annually.) If your age is:
- 40 or younger, you can withdraw $420 tax-free to pay long-term care insurance premiums
- 41 to 50, you can withdraw $780
- 51 to 60, you can withdraw $1,560
- 61 to 70, you can withdraw $4,160
- 71 or older, you can withdraw $5,200
Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.