November is the time of year when many companies begin their open enrollment period for health and other employee benefits. It is an important time to re-evaluate elections and make any updates to your election offerings, due to changes in status or maximizing the value of the benefits received.
Health plan offerings have changed a great deal over the past decade, and high-deductible health plans (HDHP) have become a common options utilized by employees. In 2003, Health Savings Accounts (HSA) were established to allow individuals to make tax-exempt contributions to pay for unreimbursed medical expenses.
Contributions to an HSA account are an “above-the-line” deduction, meaning that they will reduce adjusted gross income, and contributions to an HSA are not taxed in many states as well. One benefit to making the election during open enrollment is that the contributions can be made automatically through payroll.
Although funds in a HSA account can be used for current medical expenses, if managed efficiently the account could have significant tax benefits:
- Current tax savings – contributions reduce your taxable income
- Tax-deferred growth of earnings
- Tax-free distributions for medical expenses
One effective strategy would be to first maximize current contributions ($3,400/$3,450 single and $6,750/$6,900 family 2017/2018). This is because each dollar that can be put away will be pre-tax, resulting in immediate net savings to the taxpayer. Using the HSA for current medical expenses will allow a taxpayer to benefit from current tax savings. If the account is allowed to grow, either because contributions exceed current medical expenses, or a taxpayer pays for medical expenses out of pocket, the taxpayer can then experience the tax-free growth benefit. It should be noted that medical expenses paid direct can be withdrawn from the HSA account at a later time, including different year.
For younger taxpayers who incur little medical expenses, this would be a very beneficial account to fund and allow to grow over time. For taxpayers closer to retirement, it is worth mentioning that like a traditional IRA, distributions can be taken after age 65 for non-medical purposes without a penalty. The taxpayer would only be subject to tax on the earnings of the income. Maximizing the value of an HSA account is a smart saving strategy for any taxpayer.
If you have questions about how you can best take advantage of an HSA, or more information about HSAs, a member of the Barnes Dennig tax team is available to help. Ask us a quick question here, and we’ll have someone reach out to you.