There are certain tax “breaks” or benefits that the Tax Reform Act did not eliminate. One is the Health Savings Account (the”HSA”). HSAs help people with qualifying high-deductible health insurance policies to save money toward their healthcare expenses. Those who qualify can contribute up to an annual maximum, getting a tax deduction for the money they set aside. In most years, that maximum contribution limit goes up, and 2018’s HSA limits are increased slightly over 2017.
HSAs are coordinated with qualifying high deductible health plans. To qualify for the tax deduction, the high deductible health plan must have a MAXIMUM HSA CONTRIBUTION LEVEL OF $3,450 SINGLE/$6,850 FAMILY. The MINIMUM ANNUAL DEDUCTIBLE OF THE PLAN
MUST BE $1,350 SINGLE/$2,700 FAMILY. The Plan must also have a MAXIMUM OUT OF POCKET EXPENSE LEVELS OF $6,650 SINGLE/$13,300 FAMILY. If you are 55 or older, you can add an additional $1,000 “catch up contribution” to your HSA.
What makes an HSA so special? Currently, you can only itemize health care expenses, and then only if they exceed 10% of adjusted gross income. HSA contributions are fully tax deductible, paying no income or FICA taxes and there is no taxable income when qualifying health care payments are made from the HSA account, including no tax on any investment earnings of the HSA account assets. To the extent HSA account balances are not necessary for the current year’s health expenditures, the balances can be carried over for future needs. As an employer, you can establish group health plan options that will be a qualified as an HSA plan, and set up administration that would allow the account funds to be invested like an IRA or Roth IRA. Better than a Roth IRA, the HSA plan allows both contributions and earnings on the contributions to be tax free. A Roth IRA contribution must be after tax earnings.
That isn’t all of the benefit: A health savings account is not a use-it-or-lose-it account like a healthcare flexible spending account (the FSA); rather, it’s yours to keep, even if you change employers. And it’s a great way to build up tax-free savings for retirement healthcare needs: COBRA, Medicare and long-term care premiums are all eligible expenses. Be careful in administering the expenses: any non-healthcare qualified expenses paid out before reaching age 65 will incur income taxes plus a 20% penalty. HSAs are also portable: you can take the account with you if you change jobs or retire.
Some health related expenses that may not be eligible under an insurance plan are often eligible for payment from your HSA. While many health insurance programs may limit or may not cover acupuncture, chiropractors, or massage therapy, they actually qualify as expenses you can cover with HSA funds. To be eligible expenses paid by the HSA, they must be part of a treatment plan for a medical condition. This means you may need a diagnosis, prescription or referral from a physician. Over the counter medications can also be qualified reimbursements from your HSA. Accommodations to your home for medical devices or disabilities, or service dog related expenses may also qualify. The Health Savings Account (HSA) is a powerful tool for many entrepreneurs, small businesses and employers and employees alike.
Robert R. Lehman, JD
June 19, 2018