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Health savings accounts: What you need to know

A staff member refiles medical records at a community health-care center in Rogersville, Pa.
A staff member refiles medical records at a community health-care center in Rogersville, Pa. (Brendan Smialowski/AFP/Getty Images)
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Let’s rewind to February, when I wrote a column on a surprisingly sexy topic: health savings accounts.

Don’t laugh. This is important stuff.

HSAs are financial devices that help health-plan participants save money and become money-conscious health-care shoppers. The smart thinking these days is that the best way to drive down exorbitant U.S. health-care costs is to train and motivate baby boomers and others to be careful about how they purchase everything to do with health.

Health savings accounts have been around since 2003. More than 20 million people have one.

Think of an HSA as a 401(k) for your health care. People who qualify can save up to $6,900 (for families) this year, all of which you can claim as a tax deduction. If you are 55 or older, you can add another $1,000 to the pot — again, tax-deductible.

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Not every worker has an HSA. We don’t have HSAs at The Washington Post. We do have a flexible spending account, which allows me to save up to $2,650 in tax-deductible money this year for qualified health-care expenses such as doctor bills, medicine and even that pesky contraption called a CPAP (continuous positive airway pressure) that helps me and millions of others breathe better while sleeping.

There is one big difference between the HSA and the FSA: You can roll over the HSA like a Roth IRA and take the money out — tax-free — to cover qualified health-care costs the rest of your life.

The money in your FSA must be used by the end of the year, or you forfeit it. (Some FSAs have a “grace period,” allowing you to use your funds until March 15 of the next year.)

A person using a health savings account must be enrolled in what the federal government has called a “qualified, high-deductible health plan.”

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The Internal Revenue Service defines a high-deductible health plan as any plan with a deductible of at least $1,350 for an individual or $2,700 for a family.

The monthly premium is usually lower for a high-deductible plan, but participants pay more of their health-care costs before the insurance company begins to pay its share (your deductible).

In an HSA, which lets you save in perpetuity, the less money you pull out to cover out-of-pocket expenses in a given year, the more you can save for the future. There are a few caveats. Before age 65, withdrawals for non-qualified expenses are subject to a 20 percent penalty, along with income tax.

After age 65, withdrawals for non-qualified medical expenses are taxed as income.

I asked J.D. Piro, a senior vice president at Aon, a global professional services firm that consults on risk, retirement and health, for help.

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Piro has 30 years of experience as a lawyer and consultant in the area of employee benefits and health plans. He speaks frequently on health-care law.

Here are questions that came in after my first HSA column six months ago, followed by Piro’s answers:

Q: Can HSAs be used to pay health insurance premiums?

A: Generally speaking, no. However, HSAs can reimburse you for premiums paid for: long-term care insurance (subject to certain limits); health-care continuation coverage (e.g. COBRA); health-care coverage while receiving federal or state unemployment compensation; and Medicare and other health-care coverage, if you’re at least 65 (other than premiums for a Medicare supplemental policy).

Q: What happens to the HSA money if you die without using it all?

A: That depends on whether you have designated a beneficiary for your HSA and who your beneficiary is. If you have designated your spouse as your beneficiary, then the spouse can use the HSA. If your beneficiary is not your spouse, then the fair market value of the HSA is taxable to your beneficiary in the year that you die. If your beneficiary is your estate, the HSA becomes part of your estate and is includable on your final tax return.

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Q: The new tax law limits and places a ceiling on personal income tax deductions. For example, there is also a specific limit/ceiling on medical deductions. Does the limit/ceiling of the new law apply to HSAs?

A: With the new tax law now in effect, you need to check with a tax adviser to determine its effect on you and your tax situation.

Although Congress debated changing the laws on HSAs last year, those changes did not become part of the final tax law. You can still claim a tax deduction for contributions that you or someone other than your employer makes to your HSA, even if you don’t itemize deductions on Schedule A of Form 1040. However, Congress is currently considering several proposals that would change the rules on HSAs. Consult your tax adviser to determine whether any last-minute changes would affect you.

Q: Are you eligible to have an HSA if you are on Medicare?If you had an HSA prior to Medicare, can you still use those funds?

A: If you are entitled to (that is, enrolled in) Medicare, you are not eligible to contribute to an HSA, although you still may withdraw funds from the HSA to reimburse yourself for qualified medical expenses. If you want to delay enrollment in Medicare so you can contribute to an HSA, you can. But you should consult a tax adviser regarding the interaction between your Social Security and Medicare benefits.

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Q: Is there a limit on when you submit qualified expenses to your HSA?

A: Unlike a flexible spending account, there is no legally imposed deadline for submitting qualified expenses for HSA reimbursement.

So, theoretically, you can keep funds in your HSA and build up the account’s earnings tax-free over time. (Whether that’s a wise investment strategy is up to you and your tax and financial advisers.) But you still need to keep track of qualified expenses and receipts in the event of an audit. Regardless, only qualified medical expenses incurred after the HSA is opened will be eligible for reimbursement.

Q: Is it true most FSAs now allow a carry-over of up to $500 in unused funds, so there really isn't a "use it or lose it" rule anymore?

A: Don’t fall into the all-too-common trap of thinking that “most FSAs” automatically include “your FSA.” You need to check the terms of your FSA to see whether your FSA has adopted the $500 carry-over rule (or a lesser amount) or a more restrictive grace period rule.

And even if your FSA has adopted the $500 carry-over rule, you might end up forfeiting FSA money to the extent your FSA has more than $500 of unused money. And any FSA carry-over rules may affect the ability to contribute to an HSA. Consult your plan administrator for details.

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Q: Is it true you can have both an FSA and an HSA?

A: Generally speaking, no, unless the FSA that you’re in is a limited purpose FSA, which usually pays or reimburses only for dental and vision expenses, or a post-deductible FSA, which doesn’t pay or reimburse medical expenses until the minimum annual deductible amount under a high-deductible health plan is met. That amount, however, might be different from the HDHP’s annual deductible. Consult your plan document and your plan administrator.

Q: Do you have to be currently employed by a commercial business to enroll in an HSA?

A: You must be an “eligible individual” to qualify for an HSA, which means that:

• You are covered under a high-deductible health plan the first day of the month.

• You have no other health-care coverage except what the IRS considers permissible coverage.

• You aren’t enrolled in Medicare.

• You can’t be claimed as a dependent on someone else’s income tax return.

Consult a tax adviser to determine whether you qualify for an HSA.