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Confusing Trifecta Can Be Low Hanging Fruit to the IRS

Health Savings Accounts: Wise Steps to Keep Penalties Away

Tax shelter. Health insurance. Savings account.  

This misunderstood trifecta known as the Health Savings Account (HSA) allows consumers to use pre-tax contributions and its investment earnings to pay for eligible health expenses. This type of savings vehicle has the potential to remain free from taxation as long as the rules are followed.  

The Basics

Generally speaking, a savings account is coupled with a High Deductible Health Plan (HDHP).  Surprisingly, it is often assumed that because most deductibles are greater than $2000, ALL health plans are high deductible.  

This is not the case. If you are uncertain of the exact type of medical plan you have, contact your agent or insurance carrier to confirm.  

It is the design that determines whether a medical plan has HDHP status.  

Eyes wide open, the IRS requires active enrollment in only HDHP before you may open the accompanying Health Savings Account (HSA). Remaining enrolled in this special medical plan is the ticket to continue to make and receive annual additions. Spoiler alert: It is the consumer’s responsibility to attest to this very important detail.  

If your status is altered (change jobs, switch plan types) during the calendar year, you may need to prorate your tax-free deposits. Pay attention to the maximum annual thresholds (grid below) that consumers are allowed to shelter, per contract size.  

Last Month Rule: If you are enrolled in an HDHP from December 1st through December 31st, you are considered eligible for the entire year. A nice back door to maximize annual contributions.  

The Forms  

Money coming in is tracked via form 5498-SA. Data delivered to the IRS tracks how much income was sheltered into the HSA, per year. Monies can be received by way of payroll deductions, employer contributions or other third-parties.  

Money going out is reported on form 1099-SA. Total withdrawals from your savings will show up here.  The onus falls on the account holder to prove whether these distributions were used for qualified or non-qualified medical expenses. Save all receipts!  

Your bank or financial institution produces these informational documents that confirm the amount of  money received and spent. These forms are not required when you file, yet are important if you wish to reconcile your deposits and withdrawals. Always review and keep them with your records.  

All of your HSA math should be detailed on form 8889. Its main purpose is to calculate your tax deduction, report distributions and account for your contributions while tallying any tax penalty that may have occurred during the year. This important document must be submitted with your Federal tax return.  

The Penalties  

Provided that your tax return is “open,” or you have an active HSA, verification of all qualified medical expenses will be a hard requirement should an audit occur. IRS Publication 502 reveals exact health  related items that qualify.  

If it is determined that funds were used for non-qualified items, the IRS will impose a 20% penalty and the expenses will be taxed as ordinary income.  

Annual sums in excess of IRS limits are subjected to a 6% penalty each year the excessive funds remain sheltered.  

Good to Know  

  • HSA money can be used on yourself, your spouse or eligible dependents (as identified on your  Federal tax return) even if they are not currently covered by the HDHP.  

  • Rules specific to the Medicare population: Health Savings Accounts and Medicare do collide.  A portion of your annual tax favored contributions may no longer be valid as it is considered double dipping if enrolled in original Medicare Parts A, B, D (one or a combo of any) while receiving contributions in a HSA.  

  • On the upswing, once Medicare, Parts A, B or D become effective, your savings account can become more versatile. Penalty free, you may use these dollars for non-medical expenditures,  yet ordinary income tax applies.  

  • Once in a lifetime traditional IRA rollover rule: Your HSA can be fully loaded by a traditional IRA  transfer. The hitch: You must remain enrolled in a HDHP twelve months following the reassignment of dollars.  

Be aware this landscape can be tricky. Make no assumptions. Always consult with your industry experts  should questions arise as it is the taxpayer’s responsibility to keep records tidy and follow the rules!  

HSA Maximum Contribution per contract type20222023
SELF only contract3,6503,850
Two person or family contract7,3007,750
Catch-up contributions can begin at 55 years old1,0001,000
Written by

Andi Dolan 


Andi Dolan, founder of Traverse Benefits, a locally owned independent insurance agency providing health, life and disability insurance solutions for individuals, employers and Medicare beneficiaries across Northern Michigan.

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