CARL WATTS & ASSOCIATES

July 06, 2015

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The Health Savings Account (HSA) is the next stop in our journey through the items listed as adjustments to income on your 1040 Form.

HSAs are fairly new as they were established only some 12 years ago in December 2003 as part of the Medicare Prescription Drug, Improvement, and Modernization Act.

They were intended to replace the Medical Savings Accounts, encourage savings for future medical expenses related to high deductible health plans, and, at the same time, make consumers more cost conscious by having them spend their own income on medical expenses.

Since then, the HSAs have become relatively popular among the Americans who qualify for these accounts and, according to some research conducted at the end of 2014, an estimated $24.2 billion is held in HSAs amongst 13.8 million accounts.

Without any intention of influencing your options in the matter, let us just proceed with the most important details concerning this deduction.

As per the IRS definition, an HSA is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur.

No permission or authorization from the IRS is necessary to establish an HSA, but the qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider.

To be an eligible individual and qualify for an HSA, you must meet the following requirements:

  • You must be covered under a high deductible health plan (HDHP), described later, on the first day of the month;
  • You have no other health coverage except what is permitted;
  • You are not enrolled in Medicare;
  • You cannot be claimed as a dependent on someone else's 2014 tax return.

You (and your spouse, if you have family coverage) generally cannot have any other health coverage that is not an HDHP. However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you are not covered by that plan.

You can have additional insurance that provides benefits only for liabilities incurred under workers' compensation laws, tort liabilities, or liabilities related to ownership or use of property; a specific disease or illness; and a fixed amount per day (or other period) of hospitalization.

You can also have coverage (whether provided through insurance or otherwise) for accidents, disability, dental care, vision care, and long-term care.

You are considered to be eligible for the entire year if you are an eligible individual on the first day of the last month of your tax year (which is December for most taxpayers).

If another taxpayer is entitled to claim an exemption for you, you cannot claim a deduction for an HSA contribution. This is true even if the other person does not actually claim your exemption.

Each spouse who is an eligible individual who wants an HSA must open a separate HSA. You cannot have a joint HSA.

Regarding the HDHP, you should know that it has higher annual deductible than typical health plans, and a maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. Out-of-pocket expenses include co-payments and other amounts, but do not include premiums. An HDHP may provide preventive care benefits without a deductible or with a deductible less than the minimum annual deductible.
Adjustements to Income -
The Health Savings Account Deduction
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If eligible, anybody can contribute to an HSA: employee, or employer, or both; the self-employed and the unemployed. Family members or any other person may also make contributions on behalf of an eligible individual.

Just keep in mind that contributions to an HSA must be made in cash and have certain limits.

The amount you or any other person can contribute to your HSA 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 2015, if you have self-only HDHP coverage, you can contribute up to $3,350. If you have family HDHP coverage you can contribute up to $6,650.


For 2016, you can contribute up to $3,350 as an individual and if you have family HDHP coverage you can contribute up to $6,750.

If you are 55 or older at the end of your tax year, your contribution limit is increased by $1,000 with the so-called catch-up contribution.

The funds in your HSA are usually invested in a manner similar to investments in an individual retirement account (IRA). A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA. You can roll over amounts from Archer MSAs and other HSAs into an HSA. You do not have to be an eligible individual to make a rollover contribution from your existing HSA to a new HSA. Rollover contributions do not need to be in cash and are not subject to the annual contribution limits. You must roll over the amount within 60 days after the date of receipt. You can make only one rollover contribution to an HSA during a 1-year period.


Generally, you can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income.


Report all contributions to your HSA on Form 8889 and file it with your Form 1040 or Form 1040NR. You should include all contributions made for the tax year, including those made by April 15 of the following year that are designated for that tax year. Contributions made by your employer and qualified HSA funding distributions are also shown on the form.

You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount contributed to your HSA during the year.

Your employer's contributions will be shown in box 12 of Form W-2, Wage and Tax Statement, with code W.

You should also keep in mind that excess contributions are not deductible.

As mentioned before, this newsletter’s purpose is to familiarize you with the HSA deduction as an adjustment to income.

It would take another newsletter at least to discuss the numerous rules that encompass the HSAs contributions and distributions and what are the overall advantages and disadvantages.

For your own personal needs, it is always preferable to discuss your options with a professional financial or tax advisor.