29: Health Savings Accounts

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Cool employers offer health savings accounts!

Health Savings Accounts were created in 2003 so that individuals covered by high-deductible health plans could receive tax-preferred treatment of money saved for medical expenses. These underutilized accounts have fantastic benefits to your employees.

What is a Health Savings Account?

A bank account that your employees own where they and/or you, the employer, deposit tax free money.

As long as these funds are used to cover qualified medical, dental and vision expenses they’ll never pay taxes on it. The money your employees contribute is deducted from their gross pay before taxes are calculated, and contributions you make to their accounts are not included in their taxable income.

The annual limits for 2016 are $3,350 for an individual and $6,750 for a family.

Each year your employees can deposit the maximum amount allowed and whatever they don’t use, remains in the account, accumulating year over year. You and your employees have until April 15th to make contributions to their HSA for the prior calendar year.

The HSA can only be established under a qualified high deductible health insurance plan, or HDHP and you can’t be covered by another non HDHP plan at the same time. The idea is that during the year employees will have to pay for medical expenses that aren’t covered by your insurance plan so at least with the HSA they can pay for those costs with tax free dollars.

In 2016 the minimum plan deductibles required for the insurance to qualify as an HDHP for purposes of an HSA are $1,300 for an individual and $2,600 for a family.

So think about that, an individual with a $1,300 deductible can save up to 2.5 times that amount each year tax free.

An employee who isn’t insured through a qualified HDHP can’t establish one, or make a tax free contribution to to an already existing HSA that was previously setup.

But if you have money in the HSA from a time when you were insured under such a plan, then you can use that money for qualified medical, dental and vision expense even if you aren’t currently insured under an HDHP.

Once you retire, you can continue to spend your HSA money tax free, on qualified medical expenses, or you can use the money for anything else, and pay normal income taxes. It works like an IRA or 401(k) in that sense. Pretty awesome, right?

Funds in the HSA can be used to pay insurance premiums for:

  • Long-term care insurance.
  • Health care continuation coverage, which is premium paid by an employee after termination.
  • Health care coverage while receiving unemployment compensation under federal or state law, and
  • Medicare and other health care coverage if you were 65 or older (but not for a Medicare supplemental policy, such as Medigap).

You don’t want to do something stupid that will disqualify your HSA and cause the money to be taxable. Like use it as security for a loan, borrow the money yourself, or use the funds for non qualified expenses.

Non-qualified distributions are included in your income and taxed at your current rate plus an additional 20% penalty.

Employer Contributions:

You can make contributions to your employees’ HSAs. You deduct the contributions on your business income tax return for the year you actually make the contributions. If the contribution is allocated to the prior year, you still deduct it in the year in which you made it.

If you decide to make contributions, you must make comparable contributions to all comparable participating employees‘ HSAs.

Your contributions are comparable if they are either:

The same amount, or

The same percentage of the annual deductible limit under the HDHP covering the employees.

Comparable participating employees are covered by your HDHP and are eligible to establish an HSA.

Comparable employees are those that have the same category of coverage, and have the same category of employment (part-time, full-time)

If you make a contribution on behalf of your employees then by January 15th you have to notify all comparable employees who have not established an HSA by December 31st that they are eligible and that they have until the last day of February to establish the HSA. If they do and the let you know then you have to make a comparable contribution for the prior year.

An HSA is a fantastic tool!

In fact, Donald Trump says in his seven point health care reform that the House and Senate should allow individuals to use Health Savings Accounts (HSAs). (well, they already do).

That contributions into HSAs should be tax-free and should be allowed to accumulate. (well, they already are – maybe he’s suggesting that the limit be increased – that would be good)

That these accounts would become part of the estate of the individual and could be passed on to heirs without fear of any death penalty. (so that would be new – right now the only way to avoid taxation of the HSA funds is if your spouse is the beneficiary and he or she uses the money for their own qualified medical expenses. Otherwise, if there’s no spouse, the money is taxed as income to whomever gets it – after the “death tax” of course.)

He goes on to say that these plans should be particularly attractive to young people who are healthy and can afford high-deductible insurance plans. These funds can be used by any member of a family without penalty. The flexibility and security provided by HSAs will be of great benefit to all who participate.

Conclusion:

An HSA is an employee owned account funded by either money deducted from gross pay before taxes, post tax funds deposited by the employee that are then deducted from income on their income tax return, and employer contributions that are not considered income and are deductible as a business expense.

The money remains tax free as long as it’s spent on qualified medical expenses or certain insurance premiums.

The money can be used in retirement on non-qualified medical expenses and taxed at the individuals tax rate at the the time.

About the author, Thomas

I have 20 of years insurance industry experience in C-level management, focusing on all aspects of workers compensation, risk management, loss control, employee benefits, HR, payroll and professional employer organization (“PEO”) operations. Currently, I am the owner and CEO of Humanly HR, and founder and host of SmallBiz Brainiac; a podcast providing employer intelligence to small business owners.

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