Health Savings Accounts – Can help lower your tax now and save for the future

A health savings account is a specific type of savings account that allows you to save for paying medical expenses not covered by or paid for by your health insurance policy. With the higher standard deduction from the Tax Cuts and Jobs Act drastically limiting the number of taxpayers who will itemize their deductions along with the rising costs of health care, an HSA can help you reduce your taxable income and save for future medical costs.

How an HSA works

An HSA is funded by contributions made either pre-tax or after-tax, and, unlike a flexible spending account or FSA, the funds roll over and accumulate year to year if they are not spent. The money in your HSA remains available to pay qualified medical expenses even if you change health insurance plans, go to work for a different employer, or retire.

An HSA is generally exempt from tax; earnings on amounts in an HSA aren’t included in your taxable income while held in the HSA.

Requirements to establish an HSA

You must be covered by a high-deductible health insurance plan, or HDHP, in order to be eligible for an HSA. For 2019, an HDHP is any plan with a deductible of at least $1,350 for individual coverage or $2,700 for family coverage (for 2020 the minimum required deductible increases to $1,400 & $2,800 respectively).

Additionally, to be eligible for an HSA, you cannot have other health coverage, be enrolled in Medicare, or be claimed as a dependent on someone else’s tax return.


Contributions can come from you, your employer, a relative, or anyone else who wants to add to your HSA. And as previously mentioned, contributions can be made pre-tax or after-tax. Your employer may offer an HSA as part of your benefits, allowing you to contribute to the account through pre-tax payroll deductions. Contributions made after-tax can be deducted on your tax return and potentially reduce your taxable income.

There are limits as to how much you can contribute to an HSA; the amount you or any other person can contribute depends on the type of HDHP coverage you have, your age, the date you become an eligible individual, and the date you cease to be an eligible individual.

For 2019, you can contribute up to $3,500 if you have self-only HDHP coverage, or up to $7,000 if you have family HDHP coverage; taxpayers 55 and older can contribute a “catch-up” amount of $1,000 in addition to the standard amount. Households may have multiple accounts. For example, one spouse could have a single plan while the other has a family plan. This household can contribute up to $7,000 combined. There is a 6% excise tax for contributions over the limits if the excess contributions are not withdrawn before the tax due date. The 2020 contributions limits increase to $3,550 for self-only and $7,100 for family plans.

Significantly, contributions for 2019 can be made up to April 15, 2020, so it’s not too late to help your financial savings and/or tax situation.

Our CPAs can help you determine a contribution amount to best meet your needs, goals and circumstances.


The list of qualifying medical expenses is quite extensive and includes medical, dental and mental health services. Health insurance premiums other than Medicare premiums are not considered qualifying medical expenses for an HSA (you can use HSA money to pay Medicare premiums after you turn 65). If you pay for a qualified medical expense using your HSA, the “distribution” is neither included in your taxable income nor reported as an itemized deduction on Schedule A. It is instead reported on Form 8889 Health Savings Accounts. HSA money used to pay any nonqualified expenses must be included in taxable income, and a potential penalty of 20% of that distributed amount may apply if the funds are withdrawn before age 65.

The strategy

How can you get the greatest advantage from your HSA? Your first option is to contribute to an HSA and use the funds throughout the year to pay for medical expenses as they are incurred. For your convenience, most HSAs issue a debit card so you can pay for your eligible expenses right away. A second option is to contribute to your HSA, pay your medical expenses out-of-pocket, and let the balance in the account accumulate and grow. After you retire, you can use any remaining HSA funds to pay medical expenses during retirement. As a side note, many HSA accounts allow you to invest the money after you have reached a certain minimum balance.

Don’t forget to save your receipts! For any medical expense that you pay out-of-pocket after you establish an HSA, you can reimburse yourself at any time. For example: You can establish an account in 2019, contribute to the account in 2019, have medical expenses in 2019 that you pay for out-of-pocket instead of using HSA funds, and then reimburse yourself for those expenses in 2025 when you need the money – the 2025 distribution will be tax-free as long as the 2019 expenses were never deducted as medical expenses on your tax return. Now that the standard deduction is so much higher following the federal tax law changes, many taxpayers won’t be itemizing their medical expenses. Paying out-of-pocket and reimbursing with an HSA may be more advantageous.

Health savings accounts can lower your tax bill today and help you save for the future. HSAs are one of the few strategies that allow you to contribute and distribute money tax-free. Talk to a member of our tax team about how an HSA can benefit your specific financial and tax situations.

* This article is not a complete listing of all the details related to the tax topic and you should contact your CPA for a more detailed discussion regarding these items and how they may apply to your specific situation.