Health Savings Account Rules: 6 Little-Known HSA Tips That Will Save You Money

My Comments: This is post #5 in a series of 6 posts intended to help you better understand the advantages of HSAs. If your circumstances let you qualify for one, it could be a game changer when it comes to paying your bills in retirement.

by Adella Cellini Linecker \ November 30, 2018

A health savings account helps you sock away tax-free funds to cover health care expenses now and in retirement. But few people know all the health savings account rules. Truth is, HSAs are more versatile than you might think.

An HSA is a government-regulated savings account that lets you set aside pretax income to cover health care costs not paid by your insurance. HSAs are available to people who have a qualifying, high-deductible insurance plan. Under 2019 health savings account rules, qualifying HDHPs are defined the same as they were in 2018. To qualify, a plan must have a deductible of at least $1,350 for individuals and $2,700 for families.

HSA contribution limits for 2019 will increase $50 to $3,500 for individuals and $100 to $7,000 for families. That means a little bigger tax benefit for you. Maximum catch-up contributions for people over age 55 remain at $1,000.

Here are 6 little-known tips to maximize your HSA account:

Go Beyond Dec. 31

Put that end-of-the-year bonus to good use. Apply the funds to your HSA. Under health savings account rules, you can fill the till until tax day, as long as you don’t go over the annual HSA contribution limits set by the IRS.

If you contribute to your HSA through automatic payroll deductions, pay close attention to this tip, says Cynthia Turoski, a CPA and managing member of Albany, N.Y.-based The Bonadio Group, a financial consulting firm.

“If you didn’t reach your HSA max by the end of the year and you want to put in a little extra, you can do it until tax day,” she said.

Apply The Last-Month Rule

This health savings account rule allows individuals who are eligible on the first day of the last month of their taxpaying year, which is usually Dec. 1, to contribute the full yearly maximum. You qualify for this strategy regardless of whether you were eligible for the entire year or had non-qualifying coverage for part of the year. If you are 55 or older, you can also contribute the entire $1,000 catch-up contribution.

If you’re familiar with what HSAs are and how they work, you know you must have a high-deductible health plan (HDHP) that meets certain criteria. So let’s say your HDHP coverage started Oct. 1, 2018. Since you were covered before Dec. 1, you can contribute the maximum for 2018 — that is, $3,450 if you have individual coverage and $6,900 if you have family coverage.

One caveat: You must remain enrolled in your HDHP for the entire subsequent calendar year. If you don’t, you’ll have to prorate your contribution and report the non-eligible amount as income, Turoski says.

Use The Once-Per-Lifetime IRA Transfer

Finding funds to get started with an HSA can be difficult. One way to make it easier: Health savings account rules allow a once-per-lifetime transfer from a traditional or Roth IRA to an HSA. The same HSA contribution limits for the year apply. (If you’re looking to open an HSA outside of work, check out our list of the best HSA accounts.)

Consolidate HSAs

Maybe you opened an HSA with your last employer. Then you opened another one when you started a new job.

By consolidating accounts, consumers “can more quickly reach the threshold for investment in those HSAs that require a minimum balance to invest,” said John Young, CEO of Minnesota-based health care consultancy Consumerdriven. Investing your HSA funds can accelerate account growth.

Reimburse Yourself For Expenses

Health savings account rules give you some flexibility on when you use your funds. Let’s say you never dipped into your HSA. You paid your health care expenses out of pocket, and never withdrew money to repay yourself. But now you suddenly need a new roof. Here’s your HSA escape hatch: Use receipts for the health care expenses you paid for with non-HSA funds, and repay yourself from your HSA account.

“Collect all those receipts in a great, big folder,” Turoski said.

The beauty of this option? Health care expenses could have been incurred during any year you had your HSA.

Cover Long-Term Care

If you buy long-term-care insurance, you can use HSA funds to pay for the annual premiums. HSA rules for 2019 state that the maximum allowed to cover long-term care premiums ranges from $780 for those between ages 40 and 50 to $5,200 for those over 70.

HSA funds can also be withdrawn to cover costs that Medicare often does not cover. Examples: dental and vision care.

“As you get older, you often need more dental procedures and those could be very expensive,” Turoski said.

Help Your Loved Ones

Health savings account rules even let your HSA continue to grow tax-free after you die. How? If you name your spouse as beneficiary, he or she gets the same tax benefits you did, Turoski says. If you name your child or anyone else as beneficiary, the funds are taxable income in the year they are received.

But there is another way to help your kids.

“If you have a working child who is starting out with an HSA, you can help them by putting in the balance to maximize their annual contributions,” Turoski said. “It’s considered a gift (which itself has a limit of $15,000 per child per year), but you can put it directly into an HSA, and the child gets the tax benefit.”