Health Savings Accounts Can Reduce Tax Bills. But Beware the Paperwork

At this time of year, many people are looking for ways to reduce their tax bills. One option may be to make a contribution to a health savings account.

You can still make contributions for the 2018 tax year to an H.S.A. until the federal tax filing deadline in April, if you qualify.

“It’s not too late to save on your 2018 taxes,” said Todd Berkley, vice president of BenefitWallet, a division of Conduent that manages H.S.A.s and other employee benefits. “Most people don’t know that.”

H.S.A.s are special savings accounts that offer multiple tax benefits. Money is deposited tax free and grows tax free. It’s also withdrawn tax free, as long as funds are spent for eligible medical and health expenses.

According to Optum Bank, which offers health savings accounts, if you are in the 28 percent tax bracket and deposit $3,000 into your H.S.A., you could save $840 in federal income tax.

You can use the money in the accounts to pay for current health expenses, like doctor bills or dental care that your insurance doesn’t cover, or invest the money and let it grow to help cover future costs. There’s no spending deadline. And if you change jobs, the H.S.A. goes with you.

For 2018, an individual can contribute up to $3,450, while the maximum contribution for family coverage is $6,900. People 55 and older can save an extra $1,000. There are no income limits on who can contribute.

To use an H.S.A., however, you must have a specific type of health plan that has a high deductible — at least $1,350 for an individual, and $2,700 for a family, for 2018 — and meet other criteria, too. You can’t, for instance, contribute to an H.S.A. if you are covered by Medicare.

There’s also the paperwork to consider. Depending on your situation, you can expect one or more H.S.A.-related forms to show up online or in the mail at tax time.

If you took money from the account, you’ll receive Form 1099-SA, documenting the total spent in 2018. This form will help you fill out Form 8889, which calculates your H.S.A. deduction and is filed with your tax return.

If you put money into an H.S.A. last year, you’ll receive Form 5498-SA, showing the contributions. (If you add extra cash to the account now for 2018, you can expect to get an updated form by the end of May.)

H.S.A. contributions made by you or your employer through payroll deductions also show up on your W-2 wage and tax statement. If the amounts on your W-2 and 5498-SA don’t match, it’s probably because you made after-tax contributions or made a contribution between Jan. 1 and tax day for the previous tax year, according to Optum Bank.

“It is a paperwork hassle,” said Delia Fernandez, a fee-only financial planner in Los Alamitos, Calif. But the tax savings, she said, make the document shuffling worth it.

Andrew Crowell, vice chairman of D. A. Davidson & Company Wealth Management, said the tax documents should not scare anyone away from the benefits of saving with an H.S.A. The accounts can be used for short-term needs, he said, but they are particularly useful for saving for health needs in retirement.

Unlike traditional individual retirement accounts, he noted, H.S.A.s do not have required minimum distributions — a date by which savers must begin withdrawing money so it can be taxed. That means funds in H.S.A.s can grow for longer periods.

“There are numerous attractive tax elements to it,” Mr. Crowell said.

Here are some questions and answers about health savings accounts:


How much can I contribute to an H.S.A. for 2019?

The maximum contribution for an individual for 2019 is $3,500, and $7,000 for family coverage. People 55 and older can contribute $1,000 more.


What if I spend money from an H.S.A. for nonqualified purposes?

The I.R.S. taxes withdrawals spent on ineligible expenses as income, and tacks on a 20 percent penalty. So it’s best to save receipts and document your spending — typically, a process made easier by using a debit card and online accounts offered by H.S.A. administrators. (For a list of allowable expenses, see I.R.S. Publication 969, as well as Publication 502.)

Mr. Crowell noted that after age 65, the extra penalty goes away, and H.S.A. funds used for nonmedical purposes are simply taxed as ordinary income. That makes them a “fantastic” option for retirement savers, he said.


Is an H.S.A. the same as a flexible health spending account?

No, although the two share some similarities and are often confused. A flexible spending account lets employees set aside pretax money for health costs. But F.S.A.s have lower contribution limits, cannot be moved from one employer to another and typically bar or limit carry-overs from one year to another.


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