What are Health Savings Accounts (HSA) ?
Health savings accounts are savings accounts that allow you to contribute pre-tax dollars to pay for qualified medical expenses. Overall healthcare costs can be lowered if they are used to pay for deductibles, co-pays and coinsurance amounts.
You can contribute towards HSA only if you have a High Deductible Health Plan (HDHP).
For 2018, you are allowed to contribute up to $3,450 for self-only HDHP coverage and upto $6,900 for family HDHP Coverage. In addition, Health savings accounts allow you to rollover year after year if you do not spend towards qualified medical expenses. In most situations, health insurance companies offer HSAs for high deductible plans. In addition, Health savings accounts can also be opened through few banks and other financial institutions.
Form 8889.
All contributions to HSA can be reported on Form 8889 and be filed along with Form 1040 or Form 1040NR. You are required to include all contributions made for 2017, including those made from January 1, 2018 through April 17, 2018 that are for 2017.
Taxpayers will receive Form 5498-SA showing the amount that is contributed towards the HSA during the year. The employer contributions are shown on Box 12 W2.
Excess contributions.
If there are any excess contributions greater than the limits discussed earlier, they are not deductible. Any excess contributions will be included by your employer as gross income. If they are not included in the W2, then you are required to include them as ‘other income’ on the tax returns.
Distributions From an HSA
You will be eligible to receive tax-free distributions from your HSA to pay for qualified medical expenses after you establish the Health savings account. If you use these funds for any other reasons, the amount will be subject to additional 20% tax. Unused funds are carried over to the next year.
Distributions are reported on Form 1099–SA.
Qualified medical expenses.
Any medical or dental expenses that would qualify for medical and dental expenses deduction would be considered as qualified medical expenses for health savings deductions. These are outlined in publication 502- Medical and Dental expenses.
Non-prescription medicines are not considered qualified medical expenses for HSA. Medical expenses incurred before establishing HSA are not qualified as medical expenses.
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IRS references
https://www.irs.gov/publications/p969