Failure to use these funds as intended can result in a 20 percent tax penalty as well as exposing the distributed funds to income tax regulations. In the event that an individual chooses to use their HSA funds to pay for non-qualified expenses (medical or otherwise), they will incur significant penalties. For example, common expenses that HSAs are used to pay for include dental visits and prescriptions, among others. When the time has come to access funds inside of an HSA account, individuals will not be taxed on their withdrawals if the funds are used to directly cover the costs of medical expenses that are not explicitly covered by their HDHP. Contributions in excess of the contribution limit will be taxed at a rate of 6 percent and will not qualify as a tax-deductible on the individual's tax return. Even if an individual would like to contribute more than this sum to their account, they are unable to do so without incurring fines and penalties. For example, the 2018 annual contribution limit for HSA accounts was $3,450 for those with single medical coverage. Once the account has been established, certain contribution requirements must be observed. Finally, the applicant must not currently be enrolled in Medicare. The applicant must currently have a high deductible health plan, must have not obtained any other health care coverage and cannot be claimed as a dependent on another individual's tax return. Before the account can be finalized, the applicant must pass a series of requirements established by the IRS. When an individual applies for a high deductible health plan through their health insurance provider, it is not uncommon for the insurance company to offer them the opportunity to establish an HSA. Supporters and advocates of HSAs argue that these accounts will help slow the growth of health care costs and ensure the individuals have the resources they need to access care when it is needed. Because of this, health savings accounts can act as a long-term safeguard for individuals whose current health care offerings are less than optimal. Whereas money contributed to an FSA can no longer be accessed after one year, funds in an HSA remain present until they are spent. One of the unique factors of the HSA that is not incorporated into the FSA is the ability to roll over unused funds on a yearly basis. That being said, there are distinct differences between these two plans. Health savings accounts are often compared to flexible spending accounts, or FSAs. The primary objective of a health savings account is to provide these individuals with an additional source of income to fund health costs that cannot be covered due to limitations imposed by their plan. Health savings accounts are commonly available to individuals who have high-deductible health plans, also referred to as HDHPs. Exploring the Basics of a Health Savings Account ![]() The information provided on this form, combined with your Form 1040, will allow you to claim deductions on out-of-pocket contribution to your HSA. You can claim federal tax deductions on your HSA contributions by using IRS Form 8889.
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