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health savings account (HSA)

What is a health savings account?

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 – new adjustment for 2018

HSA regulations allow you to legally reduce federal income tax by depositing up to $3,450 a year for individuals, or $6,850 for families, into a health savings account for tax year 2018, as long as you’re covered by an HSA-qualified HDHP. 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. 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.

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 exceess 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 afore-mentioned 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.

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.

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.