A Health Savings Account (HSA) is a tax-exempt trust or custodial account established exclusively for the purpose of paying or reimbursing qualified medical expenses for you, your spouse and/or your dependents. As more and more people become accountable for managing their healthcare dollars, HSAs have become a viable way to take advantage of tax-free dollars that pay for medical care.

 Who is eligible for an HSA?

• Those who have coverage under an HSA-qualified "High Deductible Health Plan" (HDHP)
• People without any other "first-dollar" medical coverage
• Those not enrolled in Medicare
• Someone not claimed as a dependent on anyone else's tax return

Who can contribute to an HSA?

If you meet the eligibility requirements for an HSA, you, your employer, a family member and any other person may contribute to your HSA, whether you are self-employed or unemployed.

How much can I contribute to my HSA?

For 2015 an individual can contribute up to $3,350 and families can contribute up to $6,650. This year individuals who are 55 and older can contribute an additional $1,000 as a "catch-up" contribution.

How do I contribute to an HSA?

Open a Health Savings Account with a qualified bank or financial institution. You are eligible for the tax deduction when you put money into the account, not when you pay for the medical expenses; therefore, it is important to consider your options when making contributions.

If you have the ability to make pre-tax contributions through payroll, i.e., through your employer, then the contributions are also exempt from payroll taxes.  Employees get 7.65% taken out of their paychecks for FICA which funds Social Security and Medicare. Employers have to pay an additional 7.65% for FICA on top of the employee's salary.  If you as an employee make a contribution to your HSA through payroll, then you don't have to pay the 7.65% and the employer doesn't pay the 7.65% on that amount.

If you can't make contributions through payroll or you are self-employed, you can make contributions prior to paying medical expenses. This way you can fund the account and the money is in the account available to pay for out-of-pocket medical expenses.  The money left in the account at the end of the year is available to spend in future years--you don't lose the money if you don't spend it.

You also can make the contribution after paying medical expenses. Some people choose not to contribute to an HSA prior to incurring medical expenses for cash flow reasons. HSAs allow people to reimburse themselves for medical expenses after the fact. You can pay medical expenses as they come due throughout the year and then at the end of the year, add up all of the expenses you have paid, contribute that dollar amount into your HSA and then take the same amount out the next day.

If you're interested in learning more about how HSAs can be an effective tool in your tax-planning, please contact our office.