Health Savings Accounts: Easing the Sting of Rising Medical Costs

Rising medical costs and the growing use of high-deductible health plans (HDHP) by employees are making health savings accounts (HSAs) an attractive tax-advantaged option for covering qualified out-of-pocket health care costs.

Benefits that never expire

An HSA is a tax-advantaged account that can be used to pay for specific qualified medical expenses. Unlike money in flexible spending accounts (FSAs), which are designed to cover current out-of-pocket medical costs, HSA funds never expire and can be used to pay for health care expenses now and in retirement. HSAs may be offered through your employer or purchased directly if you are eligible. Accounts can be established at a bank, insurance company, or IRS-recognized third-party administrator.

Generally, contributions to an HSA are tax deductible, earnings accumulate tax deferred, and withdrawals are tax free as long as they’re used to pay for qualified expenses. If, before you turn 65, you withdraw funds from an HSA that are not used for qualified medical expenses, the withdrawal will be subject to a 20% penalty, in addition to income tax. After age 65, distributions not used for qualified medical expenses are no longer subject to the 20% penalty.


In order to establish an HSA, you must be covered by an eligible HDHP. For 2018, this is defined as a plan for which the family annual deductible minimum is at least $2,700 ($1,350 for an individual), and the annual out-of-pocket costs are limited to $13,300 for family coverage ($6,650 for an individual). Your health care benefit provider can confirm if your plan is considered an HDHP that is eligible for an HSA.

You are generally not eligible to contribute to an HSA if:

  • You are enrolled in Medicare
  • You are claimed as a dependent by another taxpayer

Contribution limits

In 2018, the HSA contribution limits are $6,850 for a family account and $3,450 for an individual account. If you are 55 or older, you may make an additional catch-up contribution of $1,000 per tax year. You can contribute to an HSA for the current tax year any time prior to the annual April tax filing date.

Contributions to an HSA may be made by you, another individual, or your employer. Employer contributions made on your behalf through a cafeteria plan are generally not income taxable to you. If you contribute directly to an HSA, these contributions are considered “above-the-line” deductions, which means that you can claim them without itemizing deductions on your tax return. Your tax advisor can provide more information on the tax treatment and deductibility of HSA contributions.

Covered medical expenses

You can make tax-free withdrawals from an HSA for qualified medical expenses for you, your spouse, or other dependents. Eligible expenses include lab fees, prescription drugs, and dental and vision care, as well as out-of-pocket health insurance deductible costs.

You may also use distributions to pay for certain insurance coverage, including:

  • Long-term care insurance (subject to specific limits and guidelines)
  • COBRA health care continuation coverage
  • Health care coverage while receiving unemployment compensation under federal or state law
  • Medicare and other health care coverage if you are 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap)

Qualified medical expenses are detailed in IRS Publication 502.

Spousal contributions

Both spouses can contribute to an HSA if they are covered separately under eligible HDHPs.

Funding an HSA with IRA distributions

You are allowed to take a qualified HSA funding distribution from your traditional IRA or Roth IRA into an HSA once in a lifetime. This must be a trustee-to-trustee transfer. The amount is limited to your maximum HSA contribution for the year minus any contributions you have made for the year. (Distributions are not allowed for SEP IRAs or SIMPLE IRAs.) A benefit of doing this is that there are no required minimum distributions beginning at age 70½ from an HSA. Plus, withdrawals can be taken income tax free when used for qualified medical expenses.

Other planning considerations

Since there are no restrictions on when you need to distribute HSA funds, you may wish to pay out-of-pocket health care costs from your current income and allow the HSA to continue to grow tax deferred, reserving those funds to cover medical care in retirement.

HSAs offer a number of other advantages, including the ability to take the account with you if you leave your employer. You can also name a beneficiary to inherit the account in the event of your death. It’s important to note that your spouse can step into your role upon your death and the account will remain an HSA. If you name a non-spouse beneficiary, however, the account will no longer be considered an HSA, and the inherited amount will be treated as taxable income.

Additional information on HSAs is available in IRS Publication 969.

If you have questions about integrating HSAs into your financial plan, please contact me at [email protected].

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.


Joelle Spear is a financial advisor located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. She offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. She can be reached at 508.598.1082 or at [email protected]

© 2018 Commonwealth Financial Network®