As premiums continue to increase, more and more people are purchasing plans with higher deductibles and no up-front copayments. Most of these plans are HSA-compatible, so we thought it might be fun to test your HSA knowledge. Below are five questions that you could get from clients relating to Health Savings Accounts. See how you do.
1. Mike is 56 years old and has a High Deductible Health Plan covering himself and his wife. If Mike opens a Health Savings Account and his wife does not, what is the maximum amount he can contribute to his Health Savings Account in 2018?
a. $3,450
b. $4,450
c. $6,900
d. $7,900
2. Sam and Iris have a family HSA-compatible plan through Sam’s employer. Sam is 67 and is enrolled in Medicare Part A. Iris is 63. Which is correct about their contribution options in 2018?
a. Sam and Iris are both HSA-eligible, but they must open separate accounts if they each want to make the catch-up contribution.
b. Sam is ineligible, but Iris can set up a Health Savings Account and deposit the $3,450 single contribution maximum plus the $1,000 catch-up contribution to an account in her name.
c. Iris is ineligible, but Sam can set up a Health Savings Account and deposit the $3,450 single contribution maximum plus the $1,000 catch-up contribution to an account in his name.
d. Sam is ineligible, but Iris can deposit $7,900 to an account in her name.
3. Mindy is 35 years old and begins 2018 with a PPO copay plan. On July 1, she switches to an HSA-qualified plan covering herself and her husband. They remain covered for the rest of 2018. Assuming her husband does not set up an HSA, what is the maximum amount Mindy can contribute to her HSA in 2018?
a. $0
b. $1,725
c. $3,450
d. $6,900
4. Anna is 66 years old. She uses her HSA to pay for a $500 diagnostic test in 2018. She also uses HSA funds for a $300 deposit on an around-the-world cruise. What is the penalty that Anna will owe based on her HSA spending in 2018?
a. $0
b. $30
c. $60
d. $300
5. Which of the following is an eligible HSA expense?
a. Vitamins
b. Over-the-counter medications
c. Dental expenses for your eight-year-old child who is not covered by your HSA-qualified plan
d. Doctor visits for your 25-year-old married child who is covered by your HSA-qualified health plan but not a tax dependent
Here are the answers to the questions, along with an explanation for each. Hopefully you did well on the quiz, but if not, that’s ok. It’s much better to miss a question now than when a client asks…
1. The correct answer is D. Mike can contribute $7,900 to his HSA in 2018. He has family coverage on his High Deductible Health Plan, and the maximum family contribution amount is $6,900. If Mike’s wife were to open an HSA, they could split the $6,900 however they would like between the two accounts. Because his wife did not open an account, though, Mike can deposit the full $6,900 family maximum into his HSA. Additionally, because Mike is over the age of 55, he can make the additional $1,000 catch-up contribution for a total of $7,900.
2. The correct answer is D. Because Sam has Medicare, he is ineligible to set up or contribute to an HSA. However, Iris is covered by a family HSA-compatible plan and does not have disqualifying coverage, so she can contribute the full $6,900 family maximum to a Health Savings Account in her name. Additionally, because she is over age 55, she can make an additional $1,000 catch-up contribution for a total of $7,900.
3. The correct answer is D. Because Mindy has HSA-qualified coverage on December 1, she can take advantage of the "last month rule," which allows her to deposit the annual maximum based on the type of coverage in effect on December 1 (family coverage). Therefore, Mindy can contribute the full family maximum of $6,900 in 2018, but she will be subject to a "testing period" of the next calendar year. If she loses HSA eligibility at any point in 2019, any excess contribution (above the pro-rated amount based on the months she had High-Deductible coverage) she made in 2018 will be treated as taxable income and be subject to a 10% penalty.
4. The correct answer is A. The $500 that Anna spent on eligible HSA expenses is completely tax free. The $300 she spent on her around-the-world cruise would normally be subject to taxes and a 20% penalty, but starting at age 65 that penalty disappears. Therefore, the $300 Anna used for the cruise will be treated as taxable income but there is no penalty.
5. The correct answer is C. Vitamins are not an eligible section 213(d) medical expense and cannot be paid with tax-free HSA dollars. Over-the-counter medications used to be an eligible expense, but since 2011 they are not. A parent can use his or her Health Savings Account funds for a dependent child's eligible expenses, even if the child is not covered under the health plan. However, parents cannot use their Health Savings Account funds for adult children who are not tax dependents, even if the adult child is covered under the parents' HSA-compatible health plan. In this situation, the adult child could set up his or her own Health Savings Account to pay with tax-free dollars for eligible medical expenses.
You may want to review IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. It includes a number of helpful examples to explain difficult Health Savings Account eligibility and contribution rules.