The Little Known Loophole That Allows Some Families To Save Beyond The Max In HSAs

September 24, 2018

Health Savings Accounts (HSAs) are often bundled with high deductible health insurance plans and can be a great tax-advantaged way to manage out-of-pocket medical expenses, as well as supplement your retirement. They can also be confusing.

If they baffle you too, you are in good company. According to a recent survey by LIMRA’s Secure Retirement Institute, only about 51% of Americans feel secure in their knowledge of Health Savings Accounts (and this survey includes financial planners!). Let’s take a quick look at what you can save with a health savings account. (it might be more than you think!)

What is an HSA?

Although the rate at which medical costs continue to rise has tapered off somewhat, a cost that increases more slowly is still an increasing expense. This means our consumer dollars continue to get stretched each year. A Health Savings Account (HSA) can be one tool that helps offset these rising health care costs.

Think of an HSA as a special type of savings account where you can contribute money on a pre-tax (or tax-deductible) basis, and then use those dollars tax-free to pay for out-of-pocket medical costs, such as health insurance deductibles, prescription medication, eye glasses, dental work, hearing aids, physical therapy, etc. You can also use this tax friendly money to help with a few retirement expenses after age 65. It’s a pretty powerful way to save, when you really get to know it better.

Deal breakers

Not everyone is eligible to contribute to an HSA, however. You must meet these requirements (check out IRS Publication 929, Health Savings Accounts and Other Tax-Favored Health Plans, for more):

  • Be participating in a group or individual high deductible health plan (HDHP) at the time of deposit.
  • Cannot be enrolled in Medicare. Be especially careful if you plan to claim your Social Security retirement benefit while still working. Doing so will automatically trigger enrollment in Medicare Part A once you’re 65, and make contributing to your HSA no longer allowed.
  • Cannot have other medical coverage in addition to the HDHP, such as coverage under your spouse’s medical plan, simultaneous health coverage at a second job or even TRICARE for veterans.
  • Cannot participate in a Flexible Spending Account (FSA) or Health Reimbursement Arrangement (HRA) unless these are limited purpose accounts that provide benefits only for dental and vision.
  • Cannot be claimed as a dependent on someone else’s tax return.

Where to find an HSA

If your group health coverage at work includes one or more HDHP options, it probably also includes access to an HSA already. Your employer might even contribute some free money to the group HSA on your behalf. However, if your HDHP at work doesn’t include an HSA, or if you purchased your own high deductible insurance plan, you can go shopping for an HSA and make tax-deductible contributions to it (even if you don’t itemize).

There are literally hundreds of financial institutions offering HSAs these days. Each plan varies according to fees charged, opportunities to invest funds, interest rates paid, etc., so it pays to do some detective work first. Fortunately, the folks at Morningstar have already done a considerable amount of legwork with respect to evaluating and ranking various HSAs. Note that even if your workplace plan DOES come with a built-in HSA, you can always roll those funds into a different account if you prefer, just beware of any transfer fees.

“Please Sir, I want some more.” (how to super-save into your account)

Did you know that you can own and contribute to more than one HSA? Suppose your employer offers an HSA and contributes some money to it on your behalf each year. While you appreciate the benefit of additional free money, maybe you are not all that thrilled with the interest rate or investment options (if available) within that particular HSA. No problem. You can open a separate HSA on your own and make tax-deductible contributions to it.

Watch the limits

Make sure your contributions (and those of your employer) across all of your HSA accounts do not exceed the annual IRS contribution limits, however. For 2018, this means individuals can contribute a maximum of $3,450. Those with family coverage can contribute up to $6,900. Again, your employer’s contribution does count toward this maximum. HSA participants who are 55 or older can make an additional “catch-up” contribution of $1,000.

When it makes sense to open a second HSA

In some cases, you may need to open more than one HSA to take full advantage of maximum contribution limits. If you and your spouse share a single family HSA and you both are 55+, only one of you can make the $1,000 catch-up contribution to the HSA. The workaround is easy, though. One of you opens a second HSA to which you contribute your $1,000 catch-up contribution.

The loophole that could allow your family to save more than the $6,900 max

If you have an adult child still covered by your medical plan (under age 26, per the Affordable Care Act), the opportunity to stash some tax-free cash is even greater. As long as your adult child files his/her own tax return (HSA participants can’t be someone else’s tax dependent), (s)he can open up a separate HSA and contribute the family maximum of $6,900 per year.

That’s right; your single child can contribute up to the family maximum thanks to independent tax status and coverage under your family’s HDHP. Sure, it’s a loophole, but if and until Congress changes the law, there it is. As an added bonus, anyone can contribute to the child’s HSA – you, the child, grandparents, anyone.

Keep in mind though, that only your child can use those savings for their own or their future dependents’ medical expenses. But what a great way to help your child fund future medical expenses – remember that you don’t have to be enrolled in a HDHP to spend HSA dollars, so he/she could feasibly use these savings many years down the road toward your future grandchildren’s expenses as well.