Health Savings Account HSA for Dividend Investors. I recently signed up for a Health Savings Account HSA with my employer A Health Savings Account is a tax-advantaged medical account which is available to individuals in the US who have enrolled into a high-deductible health plan HDHP For 2015, individuals cannot contribute more than 3,350 year, while families cannot put more than 6,650 There is a catch-up contribution of 1,000 for those 55 or older Individuals who are enrolled in Medicare are not eligible to open an HSA I signed up for the HSA mainly as another way to defer money for future investment As most of you know, I am already maxing out other tax-deferred accounts in an effort to cut one of my largest expenses. An HSA offers a triple tax advantage in most states The contributions are before tax, which means that the account holder does not pay Federal, State and FICA taxes If you were in the 25 marginal tax bracket, had a 5 state income tax rate, and you didn t pay 7 65 for FICA, you will end up saving 37 65 merely by contributing to an HSA account On 3,350, this comes out to 1,261 27 in tax savings right off the bat The money can be used for qualified medical expenses at any age, without having to pay any taxes on such withdrawals However, support documentation should be retained in case of an audit Withdrawals not for qualified medical expenses are subject to a 20 penalty and income tax After age of 65, withdrawals are tax-free for any type of distribution from the account. I was attracted to HSA s because of the large tax deduction When I contribute money to a tax-deferred vehicle, I have more money under my control, since I reduce the largest expense in my household budget taxes I have done a similar thing by maxing out 401 k and Sep IRA contributions since early 2013 I was also attracted by the fact that money put in an HSA account compounds tax-free In addition, unlike a Flexible Spending Account FSA , the money does not have to be used by a certain date Hence with an HSA the money carries over from one year to the next, and thus stays in the account and could potentially compound over time. One of the major drawbacks to HSA accounts is the large monthly fees with many providers When I reviewed different providers, it looks like a minimum account balance that is anywhere between 3,000 - 5,000 has to be maintained in cash, in order to avoid a monthly charge in the range of 2 - 5 month Many employers tend to cover this amount for their employees, so this is a benefit However, there are additional fees on each withdrawal, ordering checks to pay for items, opening fees, account closing fees etc Plus, there are monthly fees if you plan to invest that HSA money into something This is in addition to the fees for failing to maintain a minimum balance in the account In addition, most of the investment options are limited to mutual funds, some of which have really high expense ratios that come close to 1 year. The one positive thing however is that a person is not stuck with an HSA provider, if their employer offers a crappy HSA provider One can simply rollover the funds from their original HSA administrator, to the HSA administrator of their choice This is the thing I plan to do, once I max-out the 2015 contribution Until then, the money is probably going to stay in cash as it builds up every pay period evenly in 2015.The other drawback is the low limits on how much one can potentially defer If limits for individuals are increased to at least match those on IRA or Roth IRA accounts, this would be a good start. I looked at different providers, and looked at their costs to have an account, and availability of investment options In my research, I give extra points for companies that are not going to charge me 4- 5 month on a 3,000 - 6,000 balance that takes 1 2 years to build up, or at least will not charge me monthly fees after my total balances exceed a reasonable amount of dollars I am talking about eliminating as much in monthly or annual fees are possible, since some administrators tend to charge you an HSA Bank fee if you have less than 3,000 - 5,000 in a bank, in addition to charging you a monthly brokerage fee I also wanted to find the broker that would allow me as much flexibility as possible in choosing investments that do not cost me a lot. My research has identified Saturna Capital as potentially the best options for me There are no monthly fees, and there is a range of investments such as individual stocks and mutual funds that are available The commissions are steep at 14 95 trade, and there is an annual inactivity fee of 12 50 25 for mutual fund brokerage account However, if I make at least one transaction per year, this fee is waived If I end up putting 3,000 year in Saturna Capital and purchase one investment, I will end up paying no more than 0 50 on the total amount invested Since I plan on building out this HSA account for as many years as possible, I would likely keep maxing out this account, and buying one stock position per year I will reinvest dividends selectively, and put them to work with the new position If you like to drip, Saturna Capital charges 1 per reinvestment. I had never heard of Saturna Capital before, so I did some research The company is SIPC insured, which is good The downside is that they seem to require new account-holders to mail in information and forms to open an account, and it cannot be done online Of course, this is a small price to pay for keeping costs to the minimum, and allowing the maximum amount of compounding free of costs. The second option I would go with, is Wells Fargo It looks like HSA accounts with over 5,000 in combines cash and investments do not have a monthly fee assessed This is good The not so nice thing is that one is limited to a list of mutual funds only whose expense ratios are really high The lowest cost stock mutual fund was an index fund with an annual expense of 0 25.The third option could be Fidelity, which charges an annual fee of 48 However, if your household has more than 250,000 in total assets at Fidelity, this fee is waived Fidelity offers individual stock trades at 7 95 investment, plus it has a decent list of ETF s or mutual funds with low costs if that s your route If you have a 401 k with Fidelity that you have contributed to for a while, this could be a good option. The thing to consider of course is that fees can change if minimum balances are changed as well Plus, there might be fees assessed if you transfer money from one custodian to the next. My goal now is to slowly max-out the HSA limit of 3,350 in 2015, and then decide sometime in 2016 on which account to rollover that money to Although HSA accounts have been around for approximately a decade, the amount of fees charged on them seems very high Over time, I assume that those fees will decrease But even if they stayed where they are, Health Savings Accounts make perfect sense for those like me who are looking for another vehicle where they get a tax deduction upfront today, and receiving a tax-advantaged growth of their investments The real nice part is that after age of 65 I can withdraw the money for whatever reasons I desire, and will not have to pay any penalties if the money is spent on non-medical expenses, it is taxed at ordinary income tax rates I have decided that even if I have to end up with an index fund in that Health Savings Account, I would be better off than picking individual dividend stocks in a taxable account Let me walk you through a hypothetical made-up calculation. I calculated that if I choose to invest 1,000 in an HSA that generates a net annual total return of 7 year, I would end up with 5,807 in 26 years This return assumes that no taxes are taken and also assumes fees paid are subtracted from returns meaning the gross return is slightly higher However, if I were to earn those 1,000 from my day job but decided not to put them in an HSA, I would be left with 623 50 This is because I would be paying 25 Federal Tax, 5 State Tax and 7 65 FICA If I managed to earn an after-tax annual total return of 9 year for 26 years in a row, my account balance will be 5860 The break-even point will be 26 years Of course I am not comparing apples to apples here, because an after-tax return of 9 in a taxable account usually requires a return above 10 even at today s low rates on dividends and capital gains. To summarize, I believe that HSA accounts provide several benefits to investors who want to build retirement savings, and have exhausted common vehicles such as 401 k or IRA s The first advantage of HSA s is triple tax advantage, because of the deduction for Federal, State and FICA taxes This leaves more money working for the investor The second advantage is tax-deferred growth of that capital for decades The third advantage is that this money can be withdrawn at any time, penalty free if it is for qualified medical expenses It can also be withdrawn penalty free after the age of 65 The money is taxed after the age of 65 if used for non-medical purposes at the ordinary income tax rates The drawbacks behind HSA s include fees, low variety of investment options and the fact that annual contribution limits are low Of course, for those of us who understand the power of compounding, we know that even a small contribution of 3,000 year over a period of a couple decades could turn into a few nice supplement to the retirement nest egg. Dividend investing is as sexy as watching paint dry on the wall Defining an entry criteria that selects quality dividend stocks with ris. Dividend growth investing is a very simple but effective wealth building strategy The investor focuses on companies with a proven track re. Index investing has become extremely popular in recent years A lot of new investors have embraced the strategy in recent years Unfortunate. The Coca-Cola Company KO manufactures, distributes, and markets nonalcoholic beverages worldwide This dividend king has paid uninterrupt. On April 3rd, 2017, Buffett s Berkshire Hathaway BRK B will receive 148 million dollars in dividend income from their 400 million shares. The NASDAQ US Broad Dividend Achievers Select Index is comprised of a select group of securities with at least ten consecutive years of incr. As part of my monitoring process, I evaluate the list of dividend increases every week This exercise helps me observe the rate of dividend. Every week, I go through the list of dividend increases as part of my monitoring process I usually focus on those companies that have raise. I have always had a deep fascination with investing I like learning about different ways to make money, strategies, and investments It is. Every week, I review the list of dividend increases as part of my monitoring process I usually focus my attention on companies that have m. I am not a licensed investment adviser and I am not providing you with individual investment advice on this site Please consult with an investment professional before you invest your money This site is for entertainment and educational use only - any opinion expressed on the site here and elsewhere on the internet is not a form of investment advice provided to you I use information in my articles I believe to be correct at the time of writing them on my site, which information may or may not be accurate We are not liable for any losses suffered by any party because of information published on this blog Past performance is not a guarantee of future performance Unless your investments are FDIC insured, they may decline in value. By reading this site, you agree that you are solely responsible for making investment decisions in connection with your funds. Questions or Comments You can contact me at dividendgrowthinvestor at gmail dot com. HSAs When your health insurance becomes a retirement account. A few weeks ago, we received an email from a reader who had some questions about his health savings account The email raised two interesting questions Are these tax-favored insurance products becoming retirement accounts, and, to quote the email, does anybody regulate these clowns. On the first count, the answer is pretty clearly yes The personal finance subsection of the web is overflowing with advice on how to and whether you should use an HSA as a retirement account. Theoretically, HSAs are meant to be a way for you to use before-tax money to pay for your healthcare costs when you have a high-deductible plan meaning your deductible is at least 1,200 a year for an individual or 2,400 for a family before your insurance benefits kick in But they have morphed into something more than that, thanks to their triple tax advantage. Your account contributions are pre-tax or tax-deductible. All earnings, interest, and, yes, investment returns are tax-free. Any withdrawals for qualified medical expenses are tax-free Plus, once you reach age 65, all nonmedical withdrawals are taxed at your current tax rate, just like a traditional IRA If you withdraw money for nonmedical expenses before you re 65, then there s a 20 penalty. Investment returns Indeed It turns out that HSAs aren t limited to cash You certainly can put your money restricted to 3,250 for an individual or 6,450 per family per year, plus an extra 1,000 a year if you are over 55 into an FDIC-insured savings account State Farm offers such a product through State Farm Bank But many companies offer a richly varied menu to suit any risk appetite a company called Health Savings Administrators for instance, gives you a list of of no fewer than 22 Vanguard funds to choose from, including funds devoted to small-cap stocks and strategic equity. Wells Fargo offers both types of accounts When you open an HSA at Wells Fargo, you put your money in an FDIC-insured deposit account that pays a tiny bit of interest annually Once you have 2,000 in that deposit account, you then have the option to start putting money in a separate, non-insured HSA investment account with various mutual fund options. For anybody with high-deductible insurance, then, this is an attractive tax-free way to invest money in the stock market It s especially attractive to the young and healthy, since those people have a lower risk of having to tap their HSA to pay medical expenses before their money has had a chance to grow. HSAs aren t owned by your employer, or even connected to your insurance, so you can open one and keep it until you retire they are even listed in the code of federal regulations as retirement accounts And so, while they were perhaps not originally intended to be a retirement account, that s what they have morphed into. Is having an HSA catching on. As of January, there were 15 5 million people in the US with insurance plans that qualified them to open an HSA, up from 3 2 million in 2006 That said, it s hard to find data on how many people actually have an HSA There has certainly been a rapid rise in the number of employers who offer what the industry refers to as account-based health plans. High deductibles pass much of the cost of medical expenses to the individual, and also avoid the 40 excise tax that the Affordable Care Act will introduce to high-value insurance plans As the latest Towers Watson report on Reshaping Health Care puts it. Account-based health plans ABHPs can be an important strategy for reining in costs in advance of the 2018 excise tax and facilitating the shift toward greater accountability from employees and more consumer-like behavior in their purchase of health care. For people who need to make use of their health insurance often, ABHPs shift expense away from the employer and insurance company, and onto the individual However, if you are healthy, ABHPs are great their premiums are lower than other health plans, and if you don t need to spend a lot on healthcare, your money has a chance to grow in your investment HSA account Furthermore, HSA proponents argue, making consumers pay for more of their medical expenses will drive prices down as people put more effort into shopping for the lowest price for medical care. But back to our reader s second question on HSAs Who are the regulators The answer depends on what kind of account you have, and who is providing it If your HSA is in a bank, in cash, then it likely to be FDIC-insured State Farm, for instance If you have HSA money in mutual funds, however, those investments are not insured except in the case of a total bank failure, in which case the SIPC is there for you, probably Mutual funds are regulated by the SEC. Non-banks can also be HSA providers, and if your money isn t in a bank, it won t be FDIC insured Take SelectAccount for example It s a subsidiary of the insurance company Blue Cross Blue Shield of Minnesota, which is technically regulated by the Minnesota Department of Commerce The IRS continues to check that it meets the requirements to be an HSA provider, according to spokesperson Marlo Peterson It does have deposit accounts and they are not FDIC insured It also has investment HSA accounts, where the management of your investment and your mutual fund choices is outsourced to Charles Schwab In turn, Schwab is regulated by the SEC Got that. Should you use an HSA as a retirement account The simple answer is yes if you already have a high-deductible health plan, then you should, if you have the money, put the maximum amount into an HSA every year. The second question is what you should do when medical expenses come along Should you pay them out-of-pocket, using after-tax money, or should you use the funds in your HSA That s more of a judgment call, and depends in large part on whether you will miss the money if you spend it out of your pocket, rather than out of the HSA But given that substantial medical costs in retirement are almost certain for all of us, it makes sense to start saving up for them today in as tax-efficient a manner as possible. And if you re now thinking of your HSA as a place to save up for retirement medical costs, rather than for current medical costs, then it s logical to invest that money in long-term investments, like mutual funds, rather than just keeping it in cash. Just make sure that you have enough cash lying around to cover any unexpected medical costs you have for the time being The last thing you want is to be forced to use your HSA to cover near-term medical costs, just when your investments have gone south. Finally, is your money safe, in an HSA, and do you need to worry about the HSA provider going bust That one s harder, and really the only way we ll find out is if and when it happens But insofar as you re keeping your HSA funds in cash, you should certainly make sure that cash is FDIC insured. A Health Savings Account HSA is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur You must be an eligible individual to qualify for an HSA. No permission or authorization from the IRS is necessary to establish an HSA You set up an HSA with a trustee A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements IRAs or Archer MSAs The HSA can be established through a trustee that is different from your health plan provider. Your employer may already have some information on HSA trustees in your area. If you have an Archer MSA, you generally can roll it over into an HSA tax free See Rollovers later. What are the benefits of an HSA You may enjoy several benefits from having an HSA. You can claim a tax deduction for contributions you, or someone other than your employer, make to your HSA even if you don t itemize your deductions on Schedule A 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. The interest or other earnings on the assets in the account are tax free. Distributions may be tax free if you pay qualified medical expenses See Qualified medical expenses later. An HSA is portable It stays with you if you change employers or leave the work force. To be an eligible individual and qualify for an HSA, you must meet the following requirements. You are covered under a high deductible health plan HDHP , described later, on the first day of the month. You have no other health coverage except what is permitted under Other health coverage later. You aren t enrolled in Medicare. You can t be claimed as a dependent on someone else s 2016 tax return. Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year December 1 for most taxpayers. If you meet these requirements, you are an eligible individual even if your spouse has non-HDHP family coverage, provided your spouse s coverage doesn t cover you. If another taxpayer is entitled to claim an exemption for you, you can t claim a deduction for an HSA contribution This is true even if the other person doesn t actually claim your exemption. Each spouse who is an eligible individual who wants an HSA must open a separate HSA You can t have a joint HSA. High deductible health plan HDHP An HDHP has. A higher annual deductible than typical health plans, and. A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses Out-of-pocket expenses include copayments and other amounts, but don t include premiums. An HDHP may provide preventive care benefits without a deductible or with a deductible less than the minimum annual deductible Preventive care includes, but isn t limited to, the following. Periodic health evaluations, including tests and diagnostic procedures ordered in connection with routine examinations, such as annual physicals. Routine prenatal and well-child care. Child and adult immunizations. Tobacco cessation programs. Obesity weight-loss programs. Screening services This includes screening services for the following. This limit doesn t apply to deductibles and expenses for out-of-network services if the plan uses a network of providers Instead, only deductibles and out-of-pocket expenses for services within the network should be used to figure whether the limit applies. Self-only HDHP coverage is an HDHP covering only an eligible individual Family HDHP coverage is an HDHP covering an eligible individual and at least one other individual whether or not that individual is an eligible individual. An eligible individual and his dependent child are covered under an employee plus one HDHP offered by the individual s employer This is family HDHP coverage. Family plans that don t meet the high deductible rules There are some family plans that have deductibles for both the family as a whole and for individual family members Under these plans, if you meet the individual deductible for one family member, you don t have to meet the higher annual deductible amount for the family If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan doesn t qualify as an HDHP. You have family health insurance coverage in 2016 The annual deductible for the family plan is 3,500 This plan also has an individual deductible of 1,500 for each family member The plan doesn t qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible 2,600 for family coverage. Other health coverage You and your spouse, if you have family coverage generally can t have any health coverage, other than an HDHP However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you aren t covered by that plan. You can have additional insurance that provides benefits only for the following items. Liabilities incurred under workers compensation laws, tort liabilities, or liabilities related to ownership or use of property. A specific disease or illness. A fixed amount per day or other period of hospitalization. You can also have coverage whether provided through insurance or otherwise for the following items. Plans in which substantially all of the coverage is through the items listed earlier aren t HDHPs For example, if your plan provides coverage substantially all of which is for a specific disease or illness, the plan isn t an HDHP for purposes of establishing an HSA. Prescription drug plans You can have a prescription drug plan, either as part of your HDHP or a separate plan or rider , and qualify as an eligible individual if the plan doesn t provide benefits until the minimum annual deductible of the HDHP has been met If you can receive benefits before that deductible is met, you aren t an eligible individual. Other employee health plans An employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally can t make contributions to an HSA Health FSAs and HRAs are discussed later. However, an employee can make contributions to an HSA while covered under an HDHP and one or more of the following arrangements. Limited-purpose health FSA or HRA These arrangements can pay or reimburse the items listed earlier under Other health coverage except long-term care Also, these arrangements can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible. Suspended HRA Before the beginning of an HRA coverage period, you can elect to suspend the HRA The HRA doesn t pay or reimburse, at any time, the medical expenses incurred during the suspension period except preventive care and items listed under Other health coverage When the suspension period ends, you are no longer eligible to make contributions to an HSA. Post-deductible health FSA or HRA These arrangements don t pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met The deductible for these arrangements doesn t have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met. Retirement HRA This arrangement pays or reimburses only those medical expenses incurred after retirement After retirement you are no longer eligible to make contributions to an HSA. Health FSA grace period Coverage during a grace period by a general purpose health FSA is allowed if the balance in the health FSA at the end of its prior year plan is zero See Flexible Spending Arrangements FSAs later. Erika would include 2,833 33 6,750 00 3,916 67 in her gross income on her 2017 tax return Also, a 10 additional tax applies to this amount. Additional contribution If you are an eligible individual who is age 55 or older at the end of your tax year, your contribution limit is increased by 1,000 For example, if you have self-only coverage, you can contribute up to 4,350 the contribution limit for self-only coverage 3,350 plus the additional contribution of 1,000 However, see Enrolled in Medicare later. If you have more than one HSA in 2016, your total contributions to all the HSAs cannot be more than the limits discussed earlier. Reduction of contribution limit You must reduce the amount that can be contributed including any additional contribution to your HSA by the amount of any contribution made to your Archer MSA including employer contributions for the year A special rule applies to married people, discussed next, if each spouse has family coverage under an HDHP. Rules for married people If either spouse has family HDHP coverage, both spouses are treated as having family HDHP coverage If each spouse has family coverage under a separate plan, the contribution limit for 2016 is 6,750 You must reduce the limit on contributions, before taking into account any additional contributions, by the amount contributed to both spouses Archer MSAs After that reduction, the contribution limit is split equally between the spouses unless you agree on a different division. The rules for married people apply only if both spouses are eligible individuals. If both spouses are 55 or older and not enrolled in Medicare, each spouse s contribution limit is increased by the additional contribution If both spouses meet the age requirement, the total contributions under family coverage cannot be more than 8,750 Each spouse must make the additional contribution to his or her own HSA. For 2016, Mr Auburn and his wife are both eligible individuals They each have family coverage under separate HDHPs Mr Auburn is 58 years old and Mrs Auburn is 53 Mr and Mrs Auburn can split the family contribution limit 6,750 equally or they can agree on a different division If they split it equally, Mr Auburn can contribute 4,375 to an HSA one-half the maximum contribution for family coverage 3,375 1,000 additional contribution and Mrs Auburn can contribute 3,375 to an HSA. Employer contributions You must reduce the amount you, or any other person, can contribute to your HSA by the amount of any contributions made by your employer that are excludable from your income This includes amounts contributed to your account by your employer through a cafeteria plan. Enrolled in Medicare Beginning with the first month you are enrolled in Medicare, your contribution limit is zero. You turned age 65 in July 2016 and enrolled in Medicare You had an HDHP with self-only coverage and are eligible for an additional contribution of 1,000 Your contribution limit is 2,175 4,350 6 12.Qualified HSA funding distribution A qualified HSA funding distribution may be made from your traditional IRA or Roth IRA to your HSA This distribution can t be made from an ongoing SEP IRA or SIMPLE IRA For this purpose, a SEP IRA or SIMPLE IRA is ongoing if an employer contribution is made for the plan year ending with or within the tax year in which the distribution would be made. The maximum qualified HSA funding distribution depends on the HDHP coverage self-only or family you have on the first day of the month in which the contribution is made and your age as of the end of the tax year The distribution must be made directly by the trustee of the IRA to the trustee of the HSA The distribution isn t included in your income, isn t deductible, and reduces the amount that can be contributed to your HSA The qualified HSA funding distribution is shown on Form 8889 for the year in which the distribution is made. You can make only one qualified HSA funding distribution during your lifetime However, if you make a distribution during a month when you have self-only HDHP coverage, you can make another qualified HSA funding distribution in a later month in that tax year if you change to family HDHP coverage The total qualified HSA funding distribution can t be more than the contribution limit for family HDHP coverage plus any additional contribution to which you are entitled. In 2016, you are an eligible individual, age 57, with self-only HDHP coverage You can make a qualified HSA funding distribution of 4,350 3,350 plus 1,000 additional contribution. Funding distribution testing period You must remain an eligible individual during the testing period For a qualified HSA funding distribution, the testing period begins with the month in which the qualified HSA funding distribution is contributed and ends on the last day of the 12th month following that month For example, if a qualified HSA funding distribution is contributed to your HSA on August 10, 2016, your testing period begins in August 2016, and ends on August 31, 2017.If you fail to remain an eligible individual during the testing period, for reasons other than death or becoming disabled, you will have to include in income the qualified HSA funding distribution You include this amount in income in the year in which you fail to be an eligible individual This amount is also subject to a 10 additional tax The income and the additional tax are calculated on Form 8889, Part III. Each qualified HSA funding distribution allowed has its own testing period For example, you are an eligible individual, age 45, with self-only HDHP coverage On June 18, 2016, you make a qualified HSA funding distribution of 3,350 On July 27, 2016, you enroll in family HDHP coverage and on August 17, 2016, you make a qualified HSA funding distribution of 3,200 Your testing period for the first distribution begins in June 2016 and ends on June 30, 2017 Your testing period for the second distribution begins in August 2016 and ends on August 31, 2017.The testing period rule that applies under the last-month rule discussed earlier doesn t apply to amounts contributed to an HSA through a qualified HSA funding distribution If you remain an eligible individual during the entire funding distribution testing period, then no amount of that distribution is included in income and won t be subject to the additional tax for failing to meet the last-month rule testing period. A rollover contribution isn t included in your income, isn t deductible, and doesn t reduce your contribution limit. Archer MSAs and other HSAs You can roll over amounts from Archer MSAs and other HSAs into an HSA You don t have to be an eligible individual to make a rollover contribution from your existing HSA to a new HSA Rollover contributions don t need to be in cash Rollovers aren t subject to the annual contribution limits. You must roll over the amount within 60 days after the date of receipt You can make only one rollover contribution to an HSA during a 1-year period. If you instruct the trustee of your HSA to transfer funds directly to the trustee of another of your HSAs, the transfer isn t considered a rollover There is no limit on the number of these transfers Don t include the amount transferred in income, deduct it as a contribution, nor include it as a distribution on Form 8889.When To Contribute. You can make contributions to your HSA for 2016 until April 18, 2017 If you fail to be an eligible individual during 2016, you can still make contributions, up until April 18, 2017, for the months you were an eligible individual. Your employer can make contributions to your HSA between January 1, 2017, and April 18, 2017, that are allocated to 2016 Your employer must notify you and the trustee of your HSA that the contribution is for 2016 The contribution will be reported on your 2017 Form W-2.Reporting Contributions on Your Return. Contributions made by your employer aren t included in your income Contributions to an employee s account by an employer using the amount of an employee s salary reduction through a cafeteria plan are treated as employer contributions Generally, you can claim contributions you made and contributions made by any other person, other than your employer, on your behalf, as an adjustment to income. Contributions by a partnership to a bona fide partner s HSA aren t contributions by an employer The contributions are treated as a distribution of money and aren t included in the partner s gross income Contributions by a partnership to a partner s HSA for services rendered are treated as guaranteed payments that are deductible by the partnership and includible in the partner s gross income In both situations, the partner can deduct the contribution made to the partner s HSA. Contributions by an S corporation to a 2 shareholder-employee s HSA for services rendered are treated as guaranteed payments and are deductible by the S corporation and includible in the shareholder-employee s gross income The shareholder-employee can deduct the contribution made to the shareholder-employee s HSA. Form 8889 Report all contributions to your HSA on Form 8889 and file it with your Form 1040 or Form 1040NR You should include all contributions made for 2016, including those made by April 18, 2017, that are designated for 2016 Contributions made by your employer and qualified HSA funding distributions are also shown on the form. You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount contributed to your HSA during the year Your employer s contributions also will be shown in box 12 of Form W-2, Wage and Tax Statement, with code W Follow the instructions for Form 8889 Report your HSA deduction on Form 1040 or Form 1040NR. Excess contributions You will have excess contributions if the contributions to your HSA for the year are greater than the limits discussed earlier Excess contributions aren t deductible Excess contributions made by your employer are included in your gross income If the excess contribution isn t included in box 1 of Form W-2, you must report the excess as Other income on your tax return. Generally, you must pay a 6 excise tax on excess contributions See Form 5329, Additional Taxes on Qualified Plans Including IRAs and Other Tax-Favored Accounts, to figure the excise tax The excise tax applies to each tax year the excess contribution remains in the account. You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions. You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made. You withdraw any income earned on the withdrawn contributions and include the earnings in Other income on your tax return for the year you withdraw the contributions and earnings. If you fail to remain an eligible individual during any of the testing periods, discussed earlier, the amount you have to include in income isn t an excess contribution If you withdraw any of those amounts, the amount is treated the same as any other distribution from an HSA, discussed later. Deducting an excess contribution in a later year You may be able to deduct excess contributions for previous years that are still in your HSA The excess contribution you can deduct for the current year is the lesser of the following two amounts. Your maximum HSA contribution limit for the year minus any amounts contributed to your HSA for the year. The total excess contributions in your HSA at the beginning of the year. Amounts contributed for the year include contributions by you, your employer, and any other person They also include any qualified HSA funding distribution made to your HSA Any excess contribution remaining at the end of a tax year is subject to the excise tax See Form 5329.Distributions From an HSA. You generally will pay medical expenses during the year without being reimbursed by your HDHP until you reach the annual deductible for the plan When you pay medical expenses during the year that aren t reimbursed by your HDHP, you can ask the trustee of your HSA to send you a distribution from your HSA. You can receive tax-free distributions from your HSA to pay or be reimbursed for qualified medical 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 You don t have to make distributions from your HSA each year. If you are no longer an eligible individual, you can still receive tax-free distributions to pay or reimburse your qualified medical expenses. Generally, a distribution is money you get from your HSA Your total distributions include amounts paid with a debit card that restricts payments to health care and amounts withdrawn from the HSA by other individuals that you have designated The trustee will report any distribution to you and the IRS on Form 1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA. Qualified medical expenses Qualified medical expenses are those expenses that generally would qualify for the medical and dental expenses deduction These are explained in Pub 502, Medical and Dental Expenses. Also, non-prescription medicines other than insulin aren t considered qualified medical expenses for HSA purposes A medicine or drug will be a qualified medical expense for HSA purposes only if the medicine or drug. Requires a prescription. Is available without a prescription an over-the-counter medicine or drug and you get a prescription for it, or. For HSA purposes, expenses incurred before you establish your HSA aren t qualified medical expenses State law determines when an HSA is established An HSA that is funded by amounts rolled over from an Archer MSA or another HSA is established on the date the prior account was established. If, under the last-month rule, you are considered to be an eligible individual for the entire year for determining the contribution amount, only those expenses incurred after you actually establish your HSA are qualified medical expenses. Qualified medical expenses are those incurred by the following persons. You and your spouse. All dependents you claim on your tax return. Any person you could have claimed as a dependent on your return except that. The person filed a joint return. The person had gross income of 4,050 or more, or. You, or your spouse if filing jointly, could be claimed as a dependent on someone else s 2016 return. For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child s exemption. You can t deduct qualified medical expenses as an itemized deduction on Schedule A Form 1040 that are equal to the tax-free distribution from your HSA. Insurance premiums You can t treat insurance premiums as qualified medical expenses unless the premiums are for. Long-term care insurance. Health care continuation coverage such as coverage under COBRA. Health care coverage while receiving unemployment compensation under federal or state law. Medicare and other health care coverage if you were 65 or older other than premiums for a Medicare supplemental policy, such as Medigap. The premiums for long-term care insurance item 1 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 aren t qualified medical expenses. Health coverage tax credit You can t claim this credit for premiums that you pay with a tax-free distribution from your HSA See Pub 502 for more information on this credit. Deemed distributions from HSAs The following situations result in deemed taxable distributions from your HSA. You engaged in any transaction prohibited by section 4975 with respect to any of your HSAs, at any time in 2016 Your account ceases to be an HSA as of January 1, 2016, and you must include the fair market value of all assets in the account as of January 1, 2016, on Form 8889.You used any portion of any of your HSAs as security for a loan at any time in 2016 You must include the fair market value of the assets used as security for the loan as income on Form 1040 or Form 1040NR. Examples of prohibited transactions include the direct or indirect. Sale, exchange, or leasing of property between you and the HSA. Lending of money between you and the HSA. Furnishing goods, services, or facilities between you and the HSA, and. Transfer to or use by you, or for your benefit, of any assets of the HSA. Any deemed distribution won t be treated as used to pay qualified medical expenses These distributions are included in your income and are subject to the additional 20 tax, discussed later. Recordkeeping You must keep records sufficient to show that. The distributions were exclusively to pay or reimburse qualified medical expenses. The qualified medical expenses hadn t been previously paid or reimbursed from another source, and. The medical expenses hadn t been taken as an itemized deduction in any year. Don t send these records with your tax return Keep them with your tax records. Reporting Distributions on Your Return. How you report your distributions depends on whether or not you use the distribution for qualified medical expenses defined earlier. If you use a distribution from your HSA for qualified medical expenses, you don t pay tax on the distribution but you have to report the distribution on Form 8889 However, the distribution of an excess contribution taken out after the due date, including extensions, of your return is subject to tax even if used for qualified medical expenses Follow the instructions for the form and file it with your Form 1040 or Form 1040NR. If you don t use a distribution from your HSA for qualified medical expenses, you must pay tax on the distribution Report the amount on Form 8889 and file it with your Form 1040 or Form 1040NR You may have to pay an additional 20 tax on your taxable distribution. HSA administration and maintenance fees withdrawn by the trustee aren t reported as distributions from the HSA. Additional tax There is an additional 20 tax on the part of your distributions not used for qualified medical expenses Figure the tax on Form 8889 and file it with your Form 1040 or Form 1040NR. Exceptions There is no additional tax on distributions made after the date you are disabled, reach age 65, or die. To qualify for an Archer MSA, you must be either of the following. An employee or the spouse of an employee of a small employer defined later that maintains a self-only or family HDHP for you or your spouse. A self-employed person or the spouse of a self-employed person who maintains a self-only or family HDHP. You can have no other health or Medicare coverage except what is permitted under Other health coverage later You must be an eligible individual on the first day of a given month to get an Archer MSA deduction for that month. If another taxpayer is entitled to claim an exemption for you, you can t claim a deduction for an Archer MSA contribution This is true even if the other person doesn t actually claim your exemption. Small employer A small employer is generally an employer who had an average of 50 or fewer employees during either of the last 2 calendar years The definition of small employer is modified for new employers and growing employers. Growing employer A small employer may begin HDHPs and Archer MSAs for his or her employees and then grow beyond 50 employees The employer will continue to meet the requirement for small employers if he or she. Had 50 or fewer employees when the Archer MSAs began. Made a contribution that was excludable or deductible as an Archer MSA for the last year he or she had 50 or fewer employees, and. Had an average of 200 or fewer employees each year after 1996.Changing employers If you change employers, your Archer MSA moves with you However, you may not make additional contributions unless you are otherwise eligible. High deductible health plan HDHP To be eligible for an Archer MSA, you must be covered under an HDHP An HDHP has. A higher annual deductible than typical health plans, and. A maximum limit on the annual out-of-pocket medical expenses that you must pay for covered expenses. Limits The following table shows the limits for annual deductibles and the maximum out-of-pocket expenses for HDHPs for 2016.Family plans that don t meet the high deductible rules There are some family plans that have deductibles for both the family as a whole and for individual family members Under these plans, if you meet the individual deductible for one family member, you don t have to meet the higher annual deductible amount for the family If either the deductible for the family as a whole or the deductible for an individual family member is less than the minimum annual deductible for family coverage, the plan doesn t qualify as an HDHP. You have family health insurance coverage in 2016 The annual deductible for the family plan is 5,500 This plan also has an individual deductible of 2,000 for each family member The plan doesn t qualify as an HDHP because the deductible for an individual family member is less than the minimum annual deductible 4,450 for family coverage. Other health coverage You and your spouse, if you have family coverage generally can t have any other health coverage that isn t an HDHP However, you can still be an eligible individual even if your spouse has non-HDHP coverage provided you aren t covered by that plan However, you can have additional insurance that provides benefits only for the following items. Liabilities incurred under workers compensation laws, torts, or ownership or use of property. A specific disease or illness. A fixed amount per day or other period of hospitalization. You can also have coverage whether provided through insurance or otherwise for the following items. The annual deductible limit. An income limit. Annual deductible limit You or your employer can contribute up to 75 of the annual deductible of your HDHP 65 if you have a self-only plan to your Archer MSA You must have the HDHP all year to contribute the full amount If you don t qualify to contribute the full amount for the year, determine your annual deductible limit by using the Line 3 Limitation Chart and Worksheet in the Instructions for Form 8853, Archer MSAs and Long-Term Care Insurance Contracts. You have an HDHP for your family all year in 2016 The annual deductible is 5,000 You can contribute up to 3,750 5,000 75 to your Archer MSA for the year. You have an HDHP for your family for the entire months of July through December 2016 6 months The annual deductible is 5,000 You can contribute up to 1,875 5,000 75 12 6 to your Archer MSA for the year. If you and your spouse each have a family plan, you are treated as having family coverage with the lower annual deductible of the two health plans The contribution limit is split equally between you unless you agree on a different division. Income limit You can t contribute more than you earned for the year from the employer through whom you have your HDHP. If you are self-employed, you can t contribute more than your net self-employment income This is your income from self-employment minus expenses including the deductible part of self-employment tax. Simon Snowhill earned 25,000 from TR Company in 2016 Through TR, he had an HDHP for his family for the entire year The annual deductible was 5,000 He can contribute up to 3,750 to his Archer MSA 75 5,000 He can contribute the full amount because he earned more than 3,750 at TR. Westley Lawrence is self-employed He had an HDHP for his family for the entire year in 2016 The annual deductible was 5,000 Based on the annual deductible, the maximum contribution to his Archer MSA would have been 3,750 75 5,000 However, after deducting his business expenses, Westley s net self-employment income is 2,500 for the year Therefore, he is limited to a contribution of 2,500.Individuals enrolled in Medicare Beginning with the first month you are enrolled in Medicare, you can t contribute to an Archer MSA However, you may be eligible for a Medicare Advantage MSA, discussed later. Reporting Contributions on Your Return. Report all contributions to your Archer MSA on Form 8853 and file it with your Form 1040 or Form 1040NR You should include all contributions you, or your employer, made for 2016, including those made by April 18, 2017, that are designated for 2016.You should receive Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, from the trustee showing the amount you or your employer contributed during the year Your employer s contributions should be shown in box 12 of Form W-2, Wage and Tax Statement, with code R Follow the instructions for Form 8853 and complete the Line 3 Limitation Chart and Worksheet in the instructions Report your Archer MSA deduction on Form 1040 or Form 1040NR. Excess contributions You will have excess contributions if the contributions to your Archer MSA for the year are greater than the limits discussed earlier Excess contributions aren t deductible Excess contributions made by your employer are included in your gross income If the excess contribution isn t included in box 1 of Form W-2, you must report the excess as Other income on your tax return. Generally, you must pay a 6 excise tax on excess contributions See Form 5329, Additional Taxes on Qualified Plans Including IRAs and Other Tax-Favored Accounts, to figure the excise tax The excise tax applies to each tax year the excess contribution remains in the account. You may withdraw some or all of the excess contributions and avoid paying the excise tax on the amount withdrawn if you meet the following conditions. You withdraw the excess contributions by the due date, including extensions, of your tax return. You withdraw any income earned on the withdrawn contributions and include the earnings in Other income on your tax return for the year you withdraw the contributions and earnings. Deducting an excess contribution in a later year You may be able to deduct excess contributions for previous years that are still in your Archer MSA The excess contribution you can deduct in the current year is the lesser of the following two amounts. Your maximum Archer MSA contribution limit for the year minus any amounts contributed to your Archer MSA for the year. The total excess contributions in your Archer MSA at the beginning of the year. Any excess contributions remaining at the end of a tax year are subject to the excise tax See Form 5329.How you report your distributions depends on whether or not you use the distribution for qualified medical expenses, defined earlier. If you use a distribution from your Archer MSA for qualified medical expenses, you don t pay tax on the distribution but you have to report the distribution on Form 8853 Follow the instructions for the form and file it with your Form 1040 or Form 1040NR. If you don t use a distribution from your Archer MSA for qualified medical expenses, you must pay tax on the distribution Report the amount on Form 8853 and file it with your Form 1040 or Form 1040NR You may have to pay an additional 20 tax, discussed later, on your taxable distribution. If an amount other than a rollover is contributed to your Archer MSA this year by you or your employer , you also must report and pay tax on a distribution you receive from your Archer MSA this year that is used to pay medical expenses of someone who isn t covered by an HDHP, or is also covered by another health plan that is not an HDHP, at the time the expenses are incurred. Rollovers Generally, any distribution from an Archer MSA that you roll over into another Archer MSA or an HSA isn t taxable if you complete the rollover within 60 days An Archer MSA and an HSA can only receive one rollover contribution during a 1-year period See the Form 8853 instructions for more information. Additional tax There is a 20 additional tax on the part of your distributions not used for qualified medical expenses Figure the tax on Form 8853 and file it with your Form 1040 or Form 1040NR Report the additional tax in the total on Form 1040 or Form 1040NR. Exceptions There is no additional tax on distributions made after the date you are disabled, reach age 65, or die. If you have questions about a tax issue, need help preparing your tax return, or want to download free publications, forms, or instructions, go to and find resources that can help you right away. Preparing and filing your tax return Find free options to prepare and file your return on or in your local community if you qualify. The Volunteer Income Tax Assistance VITA program offers free tax help to people who generally make 54,000 or less, persons with disabilities, the elderly, and limited-English-speaking taxpayers who need help preparing their own tax returns The Tax Counseling for the Elderly TCE program offers free tax help for all taxpayers, particularly those who are 60 years of age and older TCE volunteers specialize in answering questions about pensions and retirement-related issues unique to seniors. You can go to and click on the Filing tab to see your options for preparing and filing your return which include the following. Free File Go to See if you qualify to use brand-name software to prepare and e-file your federal tax return for free. VITA Go to download the free IRS2Go app, or call 1-800-906-9887 to find the nearest VITA location for free tax preparation. TCE Go to download the free IRS2Go app, or call 1-888-227-7669 to find the nearest TCE location for free tax preparation. Getting answers to your tax law questions On get answers to your tax questions anytime, anywhere. Go to or pages for a variety of tools that will help you get answers to some of the most common tax questions. Go to for the Interactive Tax Assistant, a tool that will ask you questions on a number of tax law topics and provide answers You can print the entire interview and the final response for your records. Go to to get Pub 17, Your Federal Income Tax for Individuals, which features details on tax-saving opportunities, 2016 tax changes, and thousands of interactive links to help you find answers to your questions View it online in HTML or as a PDF or, better yet, download it to your mobile device to enjoy eBook features. You may also be able to access tax law information in your electronic filing software. Getting tax forms and publications Go to to view, download, or print all of the forms and publications you may need You can also download and view popular tax publications and instructions including the 1040 instructions on mobile devices as an eBook at no charge Or, you can go to to place an order and have forms mailed to you within 10 business days. Using direct deposit The fastest way to receive a tax refund is to combine direct deposit and IRS e-file Direct deposit securely and electronically transfers your refund directly into your financial account Eight in 10 taxpayers use direct deposit to receive their refund IRS issues more than 90 of refunds in less than 21 days. Delayed refund for returns claiming certain credits Due to changes in the law, the IRS can t issue refunds before February 15, 2017, for returns that claim the earned income credit EIC or the additional child tax credit ACTC This applies to the entire refund, not just the portion associated with these credits. Getting a transcript or copy of a return The quickest way to get a copy of your tax transcript is to go to Click on either Get Transcript Online or Get Transcript by Mail to order a copy of your transcript If you prefer, you can. Order your transcript by calling 1-800-908-9946.Mail Form 4506-T or Form 4506T-EZ both available on. Using online tools to help prepare your return Go to for the following. The Online EIN Application helps you get an employer identification number. The IRS Withholding Calculator estimates the amount you should have withheld from your paycheck for federal income tax purposes. The Sales Tax Deduction Calculator figures the amount you can claim if you itemize deductions on Schedule A Form 1040 , choose not to claim state and local income taxes, and you didn t save your receipts showing the sales tax you paid. Resolving tax-related identity theft issues. The IRS doesn t initiate contact with taxpayers by email or telephone to request personal or financial information This includes any type of electronic communication, such as text messages and social media channels. Go to for information and videos. If your SSN has been lost or stolen or you suspect you are a victim of tax-related identity theft, visit to learn what steps you should take. Checking on the status of your refund. Due to changes in the law, the IRS can t issue refunds before February 15, 2017, for returns that claim the EIC or the ACTC This applies to the entire refund, not just the portion associated with these credits. Download the official IRS2Go app to your mobile device to check your refund status. Call the automated refund hotline at 1-800-829-1954.Making a tax payment The IRS uses the latest encryption technology to ensure your electronic payments are safe and secure You can make electronic payments online, by phone, and from a mobile device using the IRS2Go app Paying electronically is quick, easy, and faster than mailing in a check or money order Go to to make a payment using any of the following options. IRS Direct Pay Pay your individual tax bill or estimated tax payment directly from your checking or savings account at no cost to you. Debit or credit card Choose an approved payment processor to pay online, by phone, and by mobile device. Electronic Funds Withdrawal Offered only when filing your federal taxes using tax preparation software or through a tax professional. Electronic Federal Tax Payment System Best option for businesses Enrollment is required. Check or money order Mail your payment to the address listed on the notice or instructions. Cash If cash is your only option, you may be able to pay your taxes at a participating retail store. What if I can t pay now Go to for more information about your options. Apply for an online payment agreement to meet your tax obligation in monthly installments if you can t pay your taxes in full today Once you complete the online process, you will receive immediate notification of whether your agreement has been approved. Use the Offer in Compromise Pre-Qualifier to see if you can settle your tax debt for less than the full amount you owe. Checking the status of an amended return Go to and click on Where s My Amended Return under the Tools bar to track the status of Form 1040X amended returns Please note that it can take up to 3 weeks from the date you mailed your amended return for it show up in our system and processing it can take up to 16 weeks. Understanding an IRS notice or letter Go to to find additional information about responding to an IRS notice or letter. Contacting your local IRS office Keep in mind, many questions can be resolved on without visiting an IRS Tax Assistance Center TAC Go to for the topics people ask about most If you still need help, IRS TACs provide tax help when a tax issue can t be handled online or by phone All TACs now provide service by appointment so you ll know in advance that you can get the service you need without waiting Before you visit, go to to find the nearest TAC, check hours, available services, and appointment options Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on Local Offices. Watching IRS videos The IRS Video portal contains video and audio presentations for individuals, small businesses, and tax professionals. Getting tax information in other languages For taxpayers whose native language isn t English, we have the following resources available Taxpayers can find information on in the following languages.
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