Question 1 (1 point) Which of the following statements is true about health savi

Question

Question 1 (1 point) Which of the following statements is true about health savings accounts (HSAs)? There is no restriction on the kind of health insurance taxpayers must carry in order to qualify for an HSA. Contributions to HSAs are not deductible for adjusted gross income (AGI), but are tre ated as an itemized deduction Individ uals taking distributions from HSAs which are not for medical expenses are subject to a 50 percent penalty. Distributions from HSAs are tax and penalty free when used for qualified medical expenses. Taxpayers may take tax and penalty free distributions from HSAs to purchase automobiles after age 65. Save

Explanation / Answer

Distributions from HSAs are tax and Penalty free when used for qualified medical expenses.

WHO MAY BENEFIT FROM HSA DISTRIBUTIONS?

HSA distributions are not tax-free unless they are used to pay for qualified medical expenses. These expenses do not necessarily have to be incurred by the HSA owner. As long as an expense is not paid or reimbursed by any other source (such as the HDHP), an HSA distribution can also be used to pay qualified medical expenses incurred by the HSA owner’s:

• Spouse (same-sex or opposite-sex);

• Dependents whom the HSA owner claims on a tax return (including some domestic partners); and

• Dependents whom the HSA owner could claim on a tax return, but:

o The person filed a joint return;

o The person had a gross income of $3,950 or more; or

o The HSA owner, or his or her spouse if filing jointly, could have been claimed as a dependent on someone else’s tax return.

For this purpose, if parents of a child are divorced, separated or living apart for the last six months of the calendar year, the child is treated as the dependent of both parents regardless of which parent claims a child's exemption.

Also, it is important to note that dependents are defined differently for HSA purposes than they are for purposes of the Affordable Care Act (ACA). While the ACA allows parents to keep their adult children on their health care policies until age 26, the laws applicable to HSAs generally do not only allow HSA owners to pay for their child’s medical care after age 19 (age 24 if the dependent is a full-time student).

HOW ARE HSA DISTRIBUTIONS TAXED?

HSA distributions are exempt from income taxes if all of the funds are used to pay qualified medical expenses that were incurred after the HSA was established. If any portion of a distribution is not used for qualified medical expenses, that portion is taxable as income and subject to a 20 percent penalty. However, an HSA owner is not subject to the 20 percent penalty on any HSA distributions that he or she takes after:

• Reaching age 65; or

• Becoming disabled.

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