Are Health Savings Accounts the Future of Healthcare? by Adam Cohen, CPA
Posted on April 21, 2017 by Adam Cohen
One consistent trend that continues to emerge from the current administration’s various plans to repeal and replace Obamacare is an increased reliance on Health Savings Accounts (HSAs). Regardless of whether or not a new plan will become the law, it is a good idea for consumers to understand how HSAs work.
Currently, these accounts are available only to workers with high-deductible health insurance plans, which are defined as those with an annual deductible in 2017 of $1,300 for self-only coverage and $2,600 for family coverage, amounts that are indexed annually for inflation. According to the most recent information from the Kaiser Family Foundation, only 19 percent of workers were enrolled in an HSA 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 and 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, an HSA allows 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 those made by their employers as well. For 2017, the IRS allows qualifying employees and their employers to contribute to an HSA up to $3,350 in pre-tax dollars for themselves or $6,750 for a family plan. Because workers own their individual accounts, rather than their employers, they may continue to keep and contribute to their HSAs long after they switched jobs and even into retirement, since there are no age-based distribution requirements. Once savings accumulate in an HSA, account owners may choose to invest these funds in an investment vehicle, such as stocks and bonds, and 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 withdrawal. 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, include annual visits to a primary care physician, 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, any 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, HSA savings cannot be used to cover the eligible medical expenses of a dependent child 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.