Are Health Savings Accounts the Future of Healthcare? UPDATED for Tax Reform by Adam Cohen, CPA
Posted on January 02, 2018 by Adam Cohen
While the current administration failed in its attempts to fully repeal the Affordable Care Act (also known as Obamacare), it did secure under a package of tax reform the elimination of the health care law’s individual mandate beginning in 2019. Regardless of how all of this will play out, one consistent trend that continues to emerge from the administration is an increased reliance on Health Savings Accounts (HSAs).
Currently, HSAs are available only to workers with high-deductible health insurance plans, which for 2017 were defined as those with an annual deductible of $1,300 for self-only coverage and $2,600 for family coverage. These amounts are indexed annually for inflation.
According to the most recent information from the Kaiser Family Foundation, only 19 percent of workers were enrolled in HSAs in 2016. However, this is expected to change, especially as more and more employers opt for high-deductible health plans.
HSA Tax Benefits
In the most basic terms, an HSA can be compared to a bank account for which eligible workers can set aside money to use solely for paying current and future health care expenses. Contributions to the account may be made by the individual, perhaps via automatic deferral from earnings, a family member or even one’s employer. However, unlike a typical savings account, HSAs allow individuals to contribute pre-tax dollars and earn interest on their investments free of taxes. In addition, annual contributions roll over from year to year, rather than following the use-it-or-lose-it rules of a traditional health reimbursement account (HRA) or health care flexible savings account (FSA).
Another tax benefit of HSAs is that qualifying participants may deduct from their taxable income not only their own HSA contributions but also those made by their employers. For 2017, the IRS allowed qualifying employees and their employers to contribute to an HSA up to $3,400 in pre-tax dollars for themselves, or $6,750 for a family plan, plus a $1,000 catch-up contribution for individuals age 55 and older. Because workers own their individual accounts, rather than their employers, they may continue to keep and contribute to their HSAs long after they switch jobs and even into retirement since there are no age-based distribution requirements. As account owners accumulate savings, they may choose to put these funds in an investment vehicle, such as stocks and bonds, which can allow their money to grow along with their retirement savings.
When HSA participants do take distributions to pay for qualifying medical expenses, including doctor visits and prescription medications, they may exclude those amounts from their taxable income in the year of the distributions. Additionally, workers may withdraw funds from their HSAs to pay for certain health insurance premium payments, including payments for COBRA coverage and for the health insurance of individuals receiving unemployment income. As an added plus, under the current Affordable Care Act, payments for preventative services, including annual visits to primary care physicians, are exempt from the HSA deductible.
Potential Pitfalls of HSAs
Despite all of the tax-advantaged benefits that HSAs provide, they do come with potential risks, especially when consumers fail to follow the rules.
For example, under current law, all withdrawals from an HSA that an individual 65 and younger uses for non-qualifying medical expenses will be subject to tax as well as a 20 percent penalty. In addition, account owners cannot use HSA savings to cover the eligible medical expenses of a dependent child who is older than 24 years of age.
With the future of health care unknown, taxpayers should take the time to understand all of their options relating to what will surely be rising health care costs in the future. The professional advisors and accountants with Berkowitz Pollack Brant have deep knowledge and experience helping taxpayers understand and comply with evolving laws while maintaining tax efficiency and wealth preservation.
About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via e-mail firstname.lastname@example.org.