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Health Savings Accounts: "What if" Scenarios

posted by on Tuesday, April 5, 2016


How to Use Your HSA Fund: Potential Scenarios

Health savings accounts (HSAs) are a great way to save money and efficiently pay for medical expenses. HSAs are tax-advantaged savings accounts that accompany high deductible health plans (HDHPs). 

While HSAs are a novel, helpful approach to paying for medical care, the fact that they combine both insurance and tax regulations make them a unique type of benefit with a fairly involved set of requirements. There can be confusion over how HSAs are administered, especially concerning unusual scenarios. The following questions address situations that HSA owners may find themselves in, but are not a typical part of standard HSA information.

What if I want to deposit the maximum annual contribution at once?

This is allowable. While HSAs are typically deducted from your paycheck and deposited every pay period, you may opt for a one-time payment provided that:

  • Your contribution does not exceed the HSA limit when added to an employer contribution. HSA limits apply to the overall account contribution, and not to each person or entity depositing money into the account. For this reason, you may need to calculate the yearly employer contribution before determining your personal maximum contribution.
  • You are eligible to contribute to an HSA for the entire year. If you obtained HSA eligibility after Jan. 1, your maximum contribution limit decreases by one-twelfth for every month you are not eligible. You can only make a contribution for the months you’re eligible. There is an exception to this rule for individuals who are eligible to contribute to an HSA on Dec. 1 of a calendar year. They are allowed to contribute an amount equal to the annual HSA contribution amount provided they remained covered by the HSA for at least a 12-month period after contributing.

What if my spouse or family member wants to make contributions to my HSA?

Family members may make contributions on behalf of other family members, provided:

  • The total contribution put forth by you, your family member and your employer does not exceed the annual contribution limit (with only a single exception for the additional catch-up contribution if the account holder is at least 55 years old).

What if I want to use an HSA to pay for my dependent’s medical care?

This is generally allowable, as qualified medical expenses include unreimbursed medical expenses of the owner, his or her spouse or dependents.

What if I use my HSA for a nonqualified medical expense? 

Nonqualified withdrawals from your HSA are considered taxable income. The money you spend would be added to your gross income and taxed, and would also be subject to a 20 percent penalty. An exception to this rule is if you are age 65 or older, are totally and permanently disabled or the withdrawal is made after you die.

What if I want to use my HSA to pay my premiums?

This would not be considered a qualified medical expense and would be subject to taxes and penalties.

What if I want to use my HSA to pay for long-term care insurance? 

This is allowable. HSA distributions used to pay for long-term care insurance premiums qualify as tax-free, penalty-free distributions. However, there is an annual limit to the amount you may contribute toward this expense, which is adjusted by the IRS every year.

What if I want to close my account?

Unless any of the previous exceptions have been met, the funds remaining in the account would be subject to taxes and penalties if withdrawn for reasons other than a qualified medical expense. 

What if I want to invest the funds in my HSA?

You can invest the funds in bank accounts, money markets, mutual funds and stocks, if that is something your HSA servicer allows. Any earnings made on the investments would not count toward your annual contribution limit. You may not invest in collectibles, art, automobiles or real estate.

What if I leave my employer?

Your HSA belongs to you regardless of your employment. If you change jobs, or stop working altogether, you can keep your total HSA balance, including all employer contributions. You can continue spending the account balance on qualified medical expenses free of taxes or penalties. 

However, you will not be able to make further contributions to your account, unless you remain enrolled in a HDHP. If you lose your HDHP, all contributions to an HSA must be suspended until you are back on an HSA-compliant HDHP plan. 

What if I change my health coverage to a plan that doesn’t allow an HSA? 

You will have to stop making contributions to your HSA, but you will be free to spend the account balance with the same tax-free benefits, provided they go toward qualified medical expenses. You could also hold on to the balance and any investments until age 65, at which point the money would be available to you with no taxes or penalties.

TrueNorth's Employee Benefits team is here to help. 

For more information on these or other HSA scenarios, contact TrueNorth today. TrueNorth offers businesses of every size comprehensive solutions to meet their business needs and those of their employees.  If you are in need of business solutions or are looking to start a business of your own, please call TrueNorth.  Our Employee Benefits division would be happy to assist you in providing the well-being of both you and your staff.  Call us today at 1-800-798-4080.