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Setting Up a Health Savings Account

Margaret Meyer
Margaret M. Whelehan, CFP®, CDFA®
Vice President, Financial Advisor
[email protected]
(585) 394-4260 x42129

What is a health savings account (HSA)?

A health savings account (HSA) is a savings vehicle established to set aside funds tax free to pay for health care expenses. HSAs allow individuals who have high-deductible health plans (HDHPs) to save money for health-care expenses tax free. HSAs can be established by any qualified individual covered by an HDHP.

Who is eligible to establish an HSA?

Generally, if you are covered under an HDHP, you are eligible to establish an HSA. In 2020, a qualifying HDHP (1) has an annual deductible of at least $1,400 for individual coverage or $2,800 for family coverage, and (2) limits annual out-of-pocket expenses (e.g., co-pays, deductibles) to $6,900 for individual coverage or $13,800 for family coverage.

You will not be eligible to open an HSA, even if you are covered under an HDHP, if any of the following apply:

  • You are already covered under a non-HDHP, including a comprehensive major medical plan, a plan sponsored by your employer or your spouse's employer, or a prescription drug plan or rider with a low deductible or no deductible. (Some health plans are exempted from this provision, including dental or vision care insurance, long-term care insurance, disability insurance, and accident insurance.)
  • You can be claimed as a dependent on another person's income tax return.
  • You are entitled to Medicare coverage (i.e., you are age 65 or older), and have enrolled in Medicare.

How do you open an HSA?

You can open an HSA on your own or, if available, through your employer. Employers may offer HSAs as part of a cafeteria plan.

An HSA is a tax-exempt trust or custodial account that can be opened through any qualified trustee or custodian, including a bank, an insurance company, or a third-party administrator. In some cases, this may be the same institution offering the HDHP.

Who can make contributions to an HSA?

You, your eligible family members, or others who wish to do so can make contributions to your HSA. If you're employed, your employer may also make contributions to your HSA. Contributions may be made directly or through salary deduction under a cafeteria plan (if offered by your employer). However, no contributions can be made to your HSA once you retire.

How much can you contribute to an HSA?

For tax year 2020, you can contribute up to $3,550 for individual coverage or $7,100 for family coverage, to your HSA. This annual limit is the sum of the limits determined separately for each month (i.e., the amount you can contribute in each month is computed by dividing the annual contribution limit by 12). Example(s): For example, Jason is covered by an HDHP starting on January 1, 2020 and will remain covered for the rest of the year. Since his maximum annual contribution limit is $3,550, his monthly contribution limit is $295.82 ($3,550 divided by 12).

You can choose to make monthly contributions to your HSA, or you can make a lump-sum contribution any time before your tax return becomes due (i.e., for most individuals, by April 15th of the year following the year for which contributions are being made), as long as your contributions have already accrued.

You may also be eligible to make additional "catch-up contributions" to your HSA if you are 55 or older. The catch-up contribution amount is $1,000. If eligible, both you and your spouse can make separate catch-up contributions to an HSA. However, no regular or catch-up contributions can be made once you reach age 65 and are enrolled in Medicare.

What if you become eligible for an HSA after the beginning of the year? In this case, your maximum contribution for the year is the annual maximum dollar amount for the year, even though you weren't eligible for the entire year. However, you must remain in the HSA-eligible plan for the entire calendar year following the last month of the year in which you made that contribution. Otherwise, the contribution will be included in your gross income for the calendar year in which you ceased to be eligible, and will be subject to an additional 20 percent penalty tax.

Can you make contributions to an HSA if you are covered under an FSA or HRA?

You may be ineligible to make contributions to an HSA if you are currently covered under a flexible spending account (FSA) or a health reimbursement arrangement (HRA) that duplicates coverage provided by the HSA.

What qualified medical expenses are covered by HSA funds?

Qualified medical expenses are health-care expenses, as defined by Internal Revenue Code 213(d). They are paid by you, your spouse, or your dependents. These include laboratory fees, prescription and nonprescription drugs, dental treatment, ambulance service, eyeglasses, and hearing aids, as well as many other health care expenses. HSA funds may also be used to cover health insurance deductibles and co-payments.

How CNB Can Help?

Canandaigua National Bank & Trust and HSA Bank have teamed up to bring HSAs to consumers and businesses. If you would like to learn more or have any questions, please visit us online at, stop by any of our Bank Offices, or contact our Customer Call Center at 585-394-4260.

Sources: Broadridge Investor Communication Solutions, Inc.; HSA Bank, a division of Webster Bank, N.A.

Tax information presented is not to be considered as tax advice and cannot be used for the purpose of avoiding tax penalties. Canandaigua National Bank & Trust does not provide tax, legal, or accounting advice. Please consult your personal tax advisor, attorney, or accountant for advice on these matters.