What is a health savings account (HSA)?
A health savings account (HSA) is a tax-free, interest-bearing account used to pay qualified medical expenses.
For 2016, the maximum contribution to an HSA is $3,350 for an individual plan or $6,750 for a family plan. This is the combined contribution from both you and your employer.
If you're 55 or older, you're allowed to contribute up to $1,000 more for a maximum of $4,350 (individual) or $7,750 (family).
There are penalties if you have an excess contribution to your HSA, unless withdrawn before filing your tax return. Also, additional tax would be owed if your distribution was used for something other than medical expenses.
To open an HSA, you must be enrolled in a high deductible health plan (HDHP) and you can’t be enrolled in Medicare or another health insurance policy (with a few exceptions). You also can’t be a dependent on somebody else's return.
With skyrocketing healthcare premiums, an increasing number of employers are offering HSAs along with HDHPs to their employees. Many people with an HSA have it through their employer and many employers also contribute to their employees' HSAs as an added incentive.
When you open an HSA, you'll start dealing with tax forms you may not be familiar with:
- Form 5498-SA, which doesn't need to be filed.
- Form 1099-SA, if you used funds in your HSA to pay for medical expenses.
- Form 8889, which reports HSA information on your tax return.