Disclaimer: Information contained below was accurate as of the date of publication. Due to frequent tax law changes, information may no longer be accurate. For the latest tax information, please contact a member CPA.

Have You Heard About HSAs?

by Andrew D. Schwartz, CPA

There's a new tax-advantaged way to fund your family's healthcare costs.  Since their introduction at the start of this year, Health Savings Accounts (HSAs) are quickly gaining in popularity. 

HSA's save you taxes in many different ways, including:

• Tax Deductible Contributions.  Amounts you contribute into an HSA reduce your taxable income. 

• Tax-deferred Growth.  Like your IRAs and 401(k)s, money invested within an HSA grows tax-deferred - which means you don't pay any taxes on the investment earnings within your account.

• Tax-free Withdrawals.  You can withdraw money out of your HSA for your family's medical expenses, at any time, without paying taxes on the amounts withdrawn. 

The theory behind HSAs makes a lot of sense.  Sock away money in a tax-advantaged account while you're young and healthy, and use that money later in life to pay for your healthcare expenses or, perhaps, even long-term care insurance. 

Let's say that you contribute $2,000 into an HSA each year over and above any money used for your family's medical expenses.  After 30 years, you'll have built up a nest egg of $225,000, assuming an 8% return on your money.  Sounds like a lot of money, right?  Maybe, but no one knows how much healthcare you'll be able to purchase in 30 years with your $225,000.

If you're fortunate enough to have money remaining in your HSA on your 65th birthday, you can use the leftover money to supplement your retirement income.  Under the current rules, seniors over the age of 65 can expect to pay taxes, but no penalties, on money withdrawn from an HSA not used for medical expenses.

Are you eligible to contribute to an HSA this year?  Yes, if you participate in a "High Deductible" health insurance plan. For single individuals, your annual deductible must be at least $1,000, while your maximum out-of-pocket expense can’t exceed $5,000.  Married couples need to double those thresholds.

The maximum annual contribution is currently the lesser of your annual deductible or either $2,600 if you're single or $5,150 if you're married.  Higher limits apply to people over the age of 55. 

You can fund an HSA yourself, or your employer might amend their benefits package to allow you to fund an HSA with pre-tax Flexible Spending Account dollars.  If your employer tends to be generous with their benefits, they might even contribute to an HSA on your behalf as a non-taxable benefit to you.

If this is the first you've heard about HSAs, it won't be the last.  Experts predict that HSAs will be much more successful than their predecessor, the Archer Medical Savings Account (MSA).  And the larger financial institutions seem to agree, as demonstrated by the fact that they're racing to launch their own HSA products. 

As the cost of healthcare continues to skyrocket, taking advantage of the various tax breaks offered by HSAs is one way to make your family's medical costs a little more affordable.

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When $1.00 is Worth $1.55 or More

by Andrew D. Schwartz, CPA

It's common knowledge that it's becoming increasingly more expensive for employers to provide health insurance and other healthcare benefits for their staff.  As the costs have been increasing over the years, businesses have done what they could to try to minimize the cost of these benefits.

Some businesses shopped their health insurance around to different insurance companies every few years, hoping to purchase their insurance at a reduced rate from an insurance company trying to increase its market share in their area.  Smaller companies might have started purchasing health insurance through a trade association or other industry specific organization in search of more cost effective benefits. 

Other employers might have switched the type of health insurance plan being offered.  Instead of offering a more traditional indemnity plan, they might have limited their employees' options to either an HMO or a PPO.  These plans tend to be less expensive than indemnity plans, but may limit their employees' access to physicians and other healthcare providers.

After fully exploring these cost cutting options, many employers were left with no choice but to shift some of the burden of paying for healthcare to their employees.  Perhaps your employer increased the amount of money you pay towards your family's healthcare each year – either through higher co-pays or larger deductibles.  Or maybe your employer simply increased the portion of the health insurance premiums that you pay each month.  Others went as far as to cut the some of the auxiliary health benefits, such as vision or dental, that they have been offering.

125 Plans

As more and more of the cost of your family's health insurance falls on your shoulders, what can you do to minimize the after-tax cost to you?  For starters, make sure to take advantage of your employer's Section 125 Cafeteria Plan.  When covered through one of these plans, you pay for your portion of your family's health insurance premiums with pre-tax dollars. 

As a participant in a cafeteria plan, your employer provides you with an allowance to purchase your benefits through the plan.  If your allowance exceeds the cost of the benefits selected, the excess is included in your paycheck as taxable wages.  If the cost of the benefits you select exceeds the allowance, you pay for the shortfall with pre-tax dollars.

Let’s look at an example where you’re required to pay $100 towards your health insurance each week.  Let’s also assume that you’re in the 28% federal tax bracket, and are still paying 7.65% for social security and Medicare taxes.  If you were not eligible to pay for your portion of your health insurance with pre-tax dollars, you would have to earn $155 to have $100 left over after paying your taxes.  Basically, it would take $1.55 in earnings to cover $1.00 in insurance premiums.

Flexible Spending Accounts

Your employer also might provide you with a flexible spending account (FSA) as part of their employee benefit package.  Through an FSA, you can pay your out-of-pocket healthcare costs with pre-tax dollars - including co-pays and deductibles.  Over-the-counter drugs, glasses and contacts, hearing aids, and even dental bills count as well.   Keep in mind that every $1.00 of healthcare expenses that you don’t pay through your FSA costs you $1.55.

Each year, it’s up to you to instruct your employer’s benefits department to withhold a set amount of money from your wages for health care costs.  Any money allocated towards your FSA reduces your earnings subject to federal taxes, social security taxes, and Medicare taxes.  If you live in a state with an income tax, each dollar you contribute to the FSA will most likely save you state taxes as well. 

There is a downside to FSAs.  When you set aside money into an FSA, if you don't "use it, you lose it".  In other words, if you don't have enough expenses to cover the amount of money you set aside, the excess will not be paid out to you.  Instead, any money remaining in your flexible spending account at the end of the year will be lost.

Plan Ahead

Whether you’re an employer or an employee, expect the amount of money that you pay for healthcare to continue to increase in the foreseeable future.  Taking advantage of your cafeteria plans and FSAs will help you minimize the after-tax cost of your healthcare expenses. 

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