Health savings accounts (“HSA’s”) provide a means for an individual or family to self insure all or a portion of their medical expenses. Contributions can be made up to a certain annual limit, and the balance carries forward from year to year. They are designed to be supplemented with a high deductible health insurance plan (“HDHP”), a medical insurance plan which covers medical expenses and, as its name implies, has a high deductible. Premiums for high deductible health plans are typically much lower than for other health insurance plans, so by saving in an HSA the individual or family is self insuring a portion of their medical expenses and by doing so is saving on premium expenses.
Health savings accounts have several tax advantages. Contributions made to HSA’s are tax deductible in the year in which they are made, grow on a tax deferred basis, and are tax free when withdrawn, as long as they are used to pay for medical expenses. Unlike traditional IRA accounts, HSA accounts are not subject to required minimum distribution rules. For the 2018 tax year, the contribution limits for health savings accounts are $3,450 for an individual and $6,900 for a family, with an additional $1,000 “catch up” contribution for individuals 55 and older. Contributions can be made to an HSA up until age 65, after which point the funds in the HSA can be used to fund out of pocket costs associated with medicare.