A client recently commented that she was irritated by her employer changing the employer sponsored health insurance plan. Before the change her annual deductible was $500.00 and now it was increasing to $2,400. She was concerned due to the amount she owed the hospital for a recent surgery. I asked if she had a Health Savings Account (HSA) and her reply was “What is an HSA”.
I responded that an HSA is a program that allows you to save for current and future medical expenses. It sounded like her health insurance plan from work was a High-Deductible Health Plan” (HDHP). I pointed out that certain HDHP health insurance plans allowed the insured to have an HSA. The requirements are as follows:
1: The annual minimum deductible for individuals must be greater than $1,350 for an individual plan and $2,700 for family plans in 2019.
2: The annual out-of-pocket maximum (including deductible, co-pays and coinsurance but not premiums) for 2019 is $6,750 for individual plans and $13,500 for family plans.
After confirming my client’s annual out of pocket expense cap with her employer’s human resources department, we determined that she qualified to have an HSA.
I explained to my client that some of the advantages to the HSA are:
- Contributions through a payroll deduction will not be included in your taxable income for income tax, Social Security Tax and Medicare Tax calculations. For her that would be about a 35% savings.
- If you contribute funds to an HSA other than through a payroll deduction the savings is limited to income taxes which for you is about 28%.
- Unlike Individual Retirement Account (IRA) tax deferred contributions, withdrawals from an HSA are considered tax-free if they are used for qualified medical expenses
- Interest and other earnings within the account are also tax-free if they are used for qualified medical expenses
- Money that has not been used in your HSA will rollover from one year to the next just like a personal savings account
- Your HSA is your account and the balance will remain with you if you change employers.
- At age 65, when you are covered by Medicare Insurance your HSA can be used to pay for non-covered expenses and supplemental insurance premiums
Contributions can be made any time during the year and up to April 15 of the following tax year. Contributions can be made in a lump sum or regularly throughout the year.
Currently the annual maximum contribution limits are:
- $3,500 for individual
- $7,000 for families
- $1,000 Catch-up contribution for anyone over 55 years old by the end of the tax year
I also explained that some of the expenses that you can pay with HSA funds include:
- Medical and dental expenses
- Hearing aids and batteries
- Eye exams and glasses or surgeries
- Guide dogs
- Therapy & counseling
- Fertility treatment
- Alcoholism treatment
I also warned her that withdrawal of funds not used for qualified medical expenses can incur taxes and penalties. If you withdraw funds for non-medical purposes, you will owe taxes on this money and possibly incur a 20% penalty. The penalty does not apply if you become disabled or when you reach age 65.
After explaining the HSA to my client, she was comfortable with the opportunity and opened an HSA at the local credit union before she filed her taxes and saved over $700 in income taxes.
For more information about an HSA and any other tax issues contact the knowledgeable staff of Tax Management & Financial Horizons at 262-923-8100 or visit our website www.managedtaxes.com.