Let’s Revisit Health Savings Accounts (HSA)

October 1st, 2017 at 8:02 AM

01 Oct Let’s Revisit Health Savings Accounts (HSA)

The health savings account (HSA) is just one of many possible health plans that you could use. I’m writing about the HSA here to alert you to some of its benefits for you personally—or for you and your employees, if you implement an HSA plan in your business.

Here’s a very tight summary of how the HSA works:

1. Deduct the health insurance cost. To enable the HSA, your health insurance must be a high-deductible health insurance policy. Sole proprietors, partners, and S corporation owners can qualify to deduct this high-deductible insurance on page 1 of Form 1040. (The page 1 Form 1040 deduction does not suffer the 10 percent haircut that applies to itemized medical deductions.) Also, you generally can deduct the cost of this insurance without having to cover the employees, too.
2. Deduct the HSA contribution. For 2017, you can make a deductible HSA contribution of up to $3,400 if you have qualifying self-only coverage or up to $6,750 if you have qualifying family coverage (anything other than self-only coverage). The deduction for the contribution is above the line, so it does not suffer from phaseouts and it’s deductible whether you itemize or not. And, as with the insurance, you likely could set this up for yourself without having to cover your employees.
3. Tax-deferred earnings. The monies accumulated in your HSA grow and compound tax deferred (even tax-free if you withdraw correctly).
4. Tax-free withdrawals. Withdrawals from your HSA are tax-free when you use the monies to pay for qualified medical expenses. You can’t pay your high-deductible premiums with HSA funds. But once you reach Medicare age, you can use the withdrawals for Medicare premiums in addition to other qualified medical expenses. If the HSA still has a balance when you die, your surviving spouse can take over the account tax-free and treat it as his or her own, as long as you have named your spouse as the beneficiary of the account.
5. Retirement withdrawals. You can make your HSA work like a traditional IRA after reaching Medicare age. To make this happen, you just withdraw funds from the HSA and don’t use them for medical expenses. This triggers the federal income tax but no penalties. (However, the use of the accumulated funds for Medicare premiums and other medical expenses means tax-free use—we like this a lot better than taxable use.)

One final point: you don’t lose the HSA contribution privilege just because you happen to be a high earner.