Learn More About HSAs

Many corporate employees are familiar with the company-sponsored 401k plan. This plan helps lower employees’ taxable income by allowing them to invest pre-tax dollars in the market so it can grow over time. Deposits made in a 401k plan typically come straight from employees’ paychecks, which is handy for people who have trouble disciplining themselves to save a little each month.

The Health Savings Account

HSAs, or Health Savings Accounts, can also help employees save for retirement. HSAs are personal savings accounts used to pay qualified out-of-pocket medical and health-related expenses. For instance, medical deductibles can be paid with HSA funds. So can chiropractic care, hearing aids, prescriptions, over-the-counter medicines, and glasses. Eligible expenses may vary by plan, so check with your HSA provider to make sure you know what’s allowed and what isn’t.

Many employees eligible for a corporate-sponsored HSA choose to fund it through automatic withdrawals from their paychecks. This is an excellent way to enforce savings for the future while maximizing tax benefits in the present. Money going into and coming out of an HSA is tax-free as long as it’s used for the right purpose. Also, HSA funds are invested in the market, and any interest or money gained from the investments is also tax-free.

Eligibility

Not everyone is eligible for an HSA account. The account has to be set up through an employer and is available only to employees on specific high-deductible health plans. However, once you’ve qualified and set up an HSA through your employer, anyone in your household can deposit money into the account as long as you remain employed. However, there are limits to how much you can contribute to an HSA. See below.

Source: https://marketplace.cms.gov/outreach-and-education/health-savings-account.pdf

Benefits

There are other benefits of investing in an HSA besides the tax advantage.

No expiration date. The funds put in an HSA account don’t expire, nor do they disappear at the end of each year if not used. The money deposited in an HSA account stays there until you use it.

Use it for other household members. HSA funds can often be used to pay qualified expenses for your spouse and children. Check your plan documents to determine whether your HSA plan can be used for other household members.

Keep it when you leave. Your HSA funds don’t disappear when you change jobs. Because you own the fund, it follows you, even when you change jobs. Note that because you’re no longer employed by the company that initially set up the HSA, you won’t be able to make deposits into the account. You will, however, still be able to access the existing funds.

Be Aware

There are a few things you need to be aware of if you’re setting up an HSA.

If you take money out before age 65 for non-medical costs or costs that don’t qualify, you’ll have to pay taxes on the amount withdrawn as well as a 20% penalty.

If you take money out after age 65 for non-medical costs, you’ll still have to pay taxes on the amount withdrawn, but you won’t be subject to the 20% penalty.

Also, you can no longer contribute to an HSA fund once you enroll in Medicare.

Don’t Get Confused

HSAs often get confused with FSAs (Flexible Spending Accounts). Both types of accounts can be used to pay qualified medical expenses, but an HSA is owned by the employee, while an FSA is owned by the employer. Many FSAs do not roll from one year to the next or, if they do, they do so in a limited fashion. Unlike an HSA, if you leave your employer, you’ll forfeit unused funds in an FSA account unless you qualify to extend the FSA through COBRA.

Questions?

There are many other rules to consider with an HSA. It sounds complicated, but these accounts are worth considering when planning for retirement. Medical costs eat up a large portion of many people’s retirement funds, and having an HSA available to pay some of these costs can be a lifesaver.

Adams Accounting Solutions can help you make smart tax decisions now that will benefit you in retirement. Call today to make an appointment or ask questions about the tax implications of an HSA. We’ll work with you to make the best choice for your future!