Montana Health Savings Accounts (HSA)

GiiG can help with your HSA options in Montana!

An individual enrolled in a qualified high-deductible health plan (HDHP) may establish an HSA. An HSA is a tax-exempt medical savings account for money to be used for paying qualified medical, dental, and vision expenses.

You can claim a tax deduction for contributions made to your HSA even if you do not itemize your deductions on Form 1040. Contributions to your HSA made by your employer (including contributions made through a cafeteria plan) may be excluded from your gross income.

The contributions remain in your account until you use them (not subject to “use it or lose it”). The interest or other earnings on the assets in the account are tax free. Distributions may be tax-free if you pay for qualified medical expenses.

How to establish an HSA

Simply go to the bank or financial institution of your choice, and open up a federally qualified HSA.  The bank may require proof of your HDHP plan.

TIP:  Some banks may charge a monthly service fee, so you may want to shop around to find one that is free of charge.

Contributing to an HSA

The amount you or any other person can contribute to your HSA depends on the type of HDHP coverage you have (individual or family).  For 2015, if you have self-only (individual) HDHP coverage, you can contribute up to $3350.  If you have family HDHP coverage, you can contribute up to $6650.

If you are an individual who is age 55 or older at the end of your tax year, your contribution limit is increased by $1000.  For example, if you have self-only coverage, you can contribute up to $4350.

Once you are on Medicare, you can no longer make contributions to an HSA.

Another resource available is the HSA Fact Sheet

For additional information on HSA contribution rules, see IRS Publication 969.

Distributions from a HSA

Generally a distribution is money you get from your health savings account.

You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical, dental, or vision expenses you incur after you establish the HSA.  If you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% tax penalty.  You do not have to take distributions from your HSA each year.  Your bank will report any distribution to you and the IRS on Form 1099-SA.

If you are no longer enrolled in an HDHP, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses.

TIP:  Keep records of your receipts and/or explanation of benefits with your tax return for the year you took the distributions.  In the event you are audited by the IRS to prove your distributions were for qualified expenses, you will easily be able to provide that documentation.

Qualified medical expenses are those incurred by you, your spouse, and all dependents you claim on your tax return.

Qualified medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any function of the body.  These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners.  They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.  This is further explained in Publication 502.

You can include in medical expenses amounts you pay for vision expenses for medical reasons (ie: glasses, contacts, exam, laser surgery).

However, some expenses do not qualify, such as:

  • Surgery for purely cosmetic purposes;
  • Health club dues;
  • Non-prescription medicines are not considered qualified medical expenses.  A medicine or drug will be a qualified medical expense if it requires a prescription or is available without a prescription (over the counter) and you get a prescription for it;

You cannot treat insurance premiums as qualified medical expenses unless the premiums are for:

  • Long term care insurance;
  • Cobra;
  • Health care coverage while receiving unemployment under federal or state law;
  • Medicare and other health care coverage if you are 65 or older (other than premiums for Medicare Supplement policy)

The premiums for long-term care insurance that you can treat as qualified medical expenses are subject to limits based on age and are adjusted annually.  See Limit on long-term care premiums you can deduct in the instructions for Schedule A (Form 1040).

Items (2) and (3) can be for your spouse or a dependent meeting the requirement for that type of coverage. For item (4), if you, the account beneficiary, are not 65 or older, Medicare premiums for coverage of your spouse or a dependent (who is 65 or older) generally are not qualified medical expenses.

Balance in a Health Savings Account

A HSA is generally exempt from tax. You are permitted to take a distribution from your HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax-free. Amounts that remain at the end of the year are generally carried over to the next year.  Earnings on amounts in an HSA are not included in your income while held in the HSA.

You should choose a beneficiary when you set up your HSA. What happens to that HSA when you die depends on whom you designate as the beneficiary.

Spouse is the designated beneficiary.   If your spouse is the designated beneficiary of your HSA, it will be treated as your spouse’s HSA after your death.

Spouse is not the designated beneficiary.   If your spouse is not the designated beneficiary of your HSA:

  • The account stops being an HSA, and
  • The fair market value of the HSA becomes taxable to the beneficiary in the year in which you die.

If your estate is the beneficiary, the value is included on your final income tax return.

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