We haven’t talked about Health Savings Accounts (HSAs) in a while, so I figured, let’s talk about it since the tax benefits are really good for all age groups and all income levels.

With the tax law changing over the last few years, most taxpayers are now taking the standard deduction, which really limits the amount of deductions available for medical costs. That’s why I like HSAs; you can take an HSA even if you take the standard deduction.

So, can anyone set up an HSA?

Unfortunately no. You have to have to be covered by what’s called a “high deductible health insurance plan.” The nice thing is, though, most companies are now going with these high deductible plans.

So, quick question, though: What is a “high deductible plan”?

It’s essentially something where your deductibles are very high before you have to actually have any insurance coverage.

But who says it’s a “high deductible”? Is it an actual thing that says …?

It is. So it’s a certain dollar limit that’s done by the IRS. But the other thing is that it can’t cover certain other costs. So just because you have a really high (let’s say $3,000, $4,000, $5,000) deductible plan doesn’t necessarily mean it’s an HSA-eligible plan. You really have to talk to your employer and insurance provider to make sure that it fits.

So if someone is eligible, how does the tax savings actually work if it’s not an itemized deduction?

What you can do is you can get a tax deduction for up to—let’s say around $7,100 for a family plan or $3,500 for a single plan—just by contributing this amount into your HSA account. And people 55 or older can contribute even more.

The other nice thing is that by contributing this money into your account, you automatically get a tax deduction, whether you spend that money or not. All you have to do is put the funds into the account. It’s that easy!

So let’s say I have a cafeteria plan at work; can I contribute before tax?

That is really my favorite part of HSAs, because you can do what’s called a payroll deduction from your W-2 payroll, and what you’ll save is income tax, Social Security and Medicare tax.

Now, for those that don’t have a cafeteria plan at work but have the ability to put money into an HSA, you can still put money directly into that account. The only difference is you get an income tax deduction only (you don’t get the Social Security and Medicare benefits).

And, you know, you can even do both as long as you don’t go over those limits (the $7,000 and $3,500 that we talked about earlier).

So, I like the fact that I can let the amounts roll over from year to year, correct?

Yes, me too, I like that idea, too. Because with a Flexible Spending Account (FSA), a lot of times those are “use it or lose it” plans; an HSA is not. You can put money in this year, and you can use it in future years.

So let’s say I have to get funds out; is it easy to do so, or is it complicated?

It is. So unlike an FSA that you may have had where you have to submit your expenses to your employer and then they reimburse you, this is pretty much a self-accountable plan. So all you have to do is go right to your bank and withdraw the funds to pay for those medical expenses. And, you know, sometimes you don’t even need to go down to the bank because many banks also allow you to use a debit card to handle those transactions directly.

So do I have to pay for medical expenses from this account?

You don’t. So, here’s why I like HSAs so much (stay with me here, just for a second!). You can actually pay for your medical expenses personally and just accumulate them. Then you can reimburse yourself from your HSA at any time. You can reimburse yourself tomorrow or you could do it five years from now. There’s nothing that says that you need to pay for a medical expense from the HSA immediately. You know, people wait until a future year to reimburse themselves because it allows that money to grow tax-free, and any income earned by the account ends up not being taxable, so people like to keep it in there as long as possible.

But if I understand correctly, though, we’re not earning much interest on an HSA.

You know, most HSA accounts are actually in just regular savings accounts. But I have some clients that actually put those funds into things like mutual funds and they treat it like an IRA and get much bigger interest—much bigger earnings—then they would if it was just in a savings account. And once again: They just pay for their medical expenses personally, and then they’ll reimburse themselves for those expenses later—maybe years down the line—but it grows this whole time tax-free.

 

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Jeff Dvorachek
I joined Hawkins Ash CPAs in 1998. I am the partner-in-charge of the Manitowoc, WI, office and tax director for the firm. I have thorough experience providing tax services to individuals, commercial businesses, nonprofit entities and estates and trusts. I also provide compilation and review services. I lead the Tax Committee and am a member of the Information Technology Advisory Committee.

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