Don’t Get Tripped Up By The IRS’ Tweak To Health Savings Accounts
Q: I heard that health savings account rules would be loosened under the new spending bill passed by Congress last month. Did that happen?
No. In fact, the standards have become slightly tighter this year. In recent years, members of Congress from both parties have supported expanding eligibility for health savings accounts and how the money in them can be spent, among other things. To date, though, those proposals haven’t become law.
Health savings accounts, which are linked to high-deductible health plans, continue to multiply. In 2017, there were 22 million accounts totaling more than $45 billion in assets, an increase of 11 percent in the number of accounts over the previous year, according to Devenir, a firm that offers advice on HSA investments. Money deposited in HSAs is tax-deductible, grows tax-free and can be used without owing tax to pay for medical expenses. Advocates promote the plans as a way to help consumers play a larger role in controlling their health spending and say that the tax advantages help people afford care.
The Internal Revenue Service announced last month that the maximum amount individuals with family coverage could contribute to their health savings accounts would actually be reduced slightly from their previously announced limit for 2018. The maximum contribution for people with individual coverage in 2018 remains $3,450. The $50 family coverage contribution reduction, from $6,900 to $6,850, is pretty small change. It happened because the federal government altered the way it calculates inflation adjustments to the contribution limits.
But ignoring the new limit could create headaches for people who have already made the maximum HSA contribution for the year based on the $6,900 figure, said Roy Ramthun, president of HSA Consulting Services. If you don’t ask the bank that handles your HSA to return the $50 plus any earnings that have accrued before the next tax season, your taxable income will be off by that amount, plus you’ll be on the hook for a 6 percent penalty for exceeding the maximum contribution allowed. That’s not going to amount to a lot of money, but there’s more than financial pain to consider, Ramthun said. “Do you really want to give the IRS a reason to come find you?”
Q: I didn’t have health insurance for one month last year, in January 2017. Do I owe a penalty for not having health insurance when I file my taxes this spring?
If you were uninsured for only one month in 2017, you won’t owe a penalty. People can be uninsured for up to three consecutive months during the year without triggering a tax penalty for not having coverage, said Tara Straw, a senior policy analyst at the Center on Budget and Policy Priorities. This year, for the first time, the Internal Revenue Service won’t accept electronically filed tax returns unless filers report whether they had health insurance all year, were exempt from the requirement or will pay a penalty for not having had coverage. Tax refunds that are due with paper returns that don’t have this information may be delayed, according to the IRS.
—khn.org