Health Savings Accounts: A Tax Efficient Health Insurance AlternativeSubmitted by Durbin Bennett on April 11th, 2016
Most business that desire to help their owners and employees, find their budgets strained by spiraling medical insurance premiums. One solution, the Health Savings Account (HSA), which was created as part of the 2003 Medicare Act, is a relatively affordable—and tax efficient—alternative to traditional managed-care group plans.
Available since January 1, 2004, HSAs are being offered by a growing number of banks and insurance companies. While experiences among employers vary, early adopters of HSAs have generally found the plans to be effective in lowering health benefit costs.
An HSA may be opened by anyone who has a qualified health insurance policy with an annual deductible of not less than $1,300 for individuals, or $2,600 for families. A firm may choose to offer a high deductible health plan (HDHP) to partners and staff, or employees can be encouraged to sign up for policies on their own. Employers are permitted to contribute to the accounts of individual employees or may offer staff incentives to put money in themselves.
Since HSA funds are intended to pay for out-of-pocket medical expenses not covered by insurance, participants are permitted to make tax-exempt yearly contributions equivalent to the annual deductible of the insurance policy, up to a maximum of $3,350 for individuals and $6,750 for families in 2016. HSA enrollees age 55 or older may make additional “catch up” contributions of up to $1,000 a year. The accounts are owned by the individual, and are fully portable from job to job.
The tax advantages of the HSA are substantial. Contributions to and withdrawals from an HSA are tax free, provided the funds are used to pay for qualified medical expenses. The investment earnings within the account also grow tax free.
Any funds left over in an HSA at the end of the year can remain in the account, and the participant may start again with contributions the following year. Enrollees who use little of the money in the account while continuing to make deposits could end up with substantial savings in retirement. Prior to age 65, non-medical distributions are taxed as part of gross income and are subject to a 10% penalty. After age 65, however, account holders are permitted to withdraw funds from an HSA for non-medical reasons by simply paying the income tax due.
Like any insurance plan, HSAs may not be the best choice for everyone. Lower income employees may find it difficult to contribute the funds necessary to cover the insurance deductible. And employees who use medical services frequently, such as young families or people with chronic health conditions, would derive little benefit from the tax advantages associated with the HSA. For these types of employees, traditional managed-care plans may be preferable. To meet the varying needs of partners and staff, business owners may want to provide several health insurance options.
When launching an HSA plan as a benefit offering, it is essential that practice managers explain to employees how the accounts work. Some employees may initially balk at the high insurance deductibles associated with HSAs, but may be persuaded to sign up if the firm assumes part of the cost. Higher earning associates, in particular, may be drawn to the considerable tax breaks provided by the HSA. Over time, employees should come to appreciate the advantages of having greater control over their health care spending, and possibly seeing their account balances grow through regular saving.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. For more information on HSAs, visit the U.S. Department of The Treasury at: http://www.treasury.gov/resource-center/faqs/Taxes/Pages/Health-Savings-Accounts.aspx. For more information on HDHP plans, see IRS Pub 969 at: http://www.irs.gov/pub/irs-pdf/p969.pdf. This material was developed and produced in part by Financial Media Exchange to provide information on a topic that may be of interest. Copyright 2014-2016 Financial Media Exchange.