The cost of healthcare is a significant concern to most Americans.  A Health Savings Account (“HSA”) allows health insurance subscribers to save federal income taxes. An HSA is a federal tax-exempt trust or custodial account that may be established by qualifying individuals with an HSA trustee, which may be a bank, insurance company, or an individual approved by the Internal Revenue Service (“IRS”).  A private HSA (meaning that an employer does not contribute funds to the HSA) allows health insurance subscribers to contribute pre-tax income to an HSA, which is tax deductible.

Contributions to an HSA do not have to be used or withdrawn during the tax year that the funds are contributed.  An HSA may also be transferred to a surviving spouse tax-free upon the death of the account holder. Funds in an HSA may be invested in stock and other securities, which may grow tax free.  However, contributions to a New Jersey HSA are not deductible for state income tax purposes in New Jersey.  Additionally, New Jersey employees who contribute to an HSA do not receive the same tax-free growth that is afforded at the federal level.

An individual may qualify for an HSA if he or she purchases a high-deductible health plan (“HDHP”). A HDHP has a minimum annual deductible of $1,400 for self-only coverage, meaning that a single person is responsible for, at minimum, the initial $1,400 in medical costs incurred per year before insurance contributes to medical expenses. The primary subscriber of a family health insurance plan, which includes the primary subscriber and at least one other individual, must pay a minimum deductible of $2,800 to become eligible to open an HSA. The maximum annual deductible and out-of-pocket expenses, which includes expenses such as co-pays, under a HDHP is $6,900 for self-only coverage and $13,800 for family coverage. Additionally, in order to qualify for an HSA, an individual cannot (i) own any other health coverage (with limited exceptions), (ii) be enrolled in Medicare and (iii) be claimed as a dependent on some else’s tax return during the previous year.

HSA contribution limits are determined on a tax-year basis. Contribution limits are generally prorated by the number of months that the HSA owner is eligible to open an HSA.  Eligibility is based on coverage status on the first day of the month. An HSA owner may be eligible for a full tax year under the “last month” rule, which states that if an HSA owner is eligible to contribute to the HSA on the first day of the last month of the tax year (December 1st), the HSA owner is eligible for the subsequent tax year.  The last day to make contributions to an HSA is April 15 of the following year.

HSA owners may claim a tax deduction for contributions to an HSA without itemizing the contributions on IRS Form 1040. If an employer contributes to an employee’s HSA, the contributions may be excluded from the HSA owner’s gross income.  Interest and earnings on the HSA assets grow tax free and an HSA owner may change employers or leave the work force entirely and retain the HSA.

If an HSA is established in 2020 and self-only HDHP coverage is maintained, an individual may contribute up to $3,550 annually to an HSA. If family HDHP coverage is maintained, contributions of up to $7,100 annually may be made to an HSA. 

During these uncertain economic times, it is prudent to utilize all available tax advantages.  Please contact an attorney if you have questions about how an HSA may save you taxes.

Michael Salad is a partner in Cooper Levenson’s Business & Tax and Cyber Risk Management practice groups. He concentrates his practice on estate planning, business transactions, mergers and acquisitions and tax matters. Michael holds an LL.M. in Estate Planning and Elder Law. Michael is licensed to practice law in New Jersey, Florida, New York, Pennsylvania, Maryland and the District of Columbia.

Katlin Trout is a summer associate in Cooper Levenson’s Atlantic City, New Jersey office.