By Beverly Gossage
As a business owner, you may be wondering if there have been changes to Health Savings Accounts in this new health-insurance environment. The good news is, HSAs did survive the new health law and their tax advantages continue to outpace other savings vehicles. This month, we celebrate the 10th anniversary of HSAs, which may be considered “IRAs on steroids.” Let’s discuss how they function in light of the Affordable Care Act, commonly called Obamacare, and outline how to maximize their value.
First things first: Ask your consultant if your plan still meets HSA qualified standards. Most insurance carriers still offer at least one HSA option in their plan portfolio for 2014 renewals, but the plan names have changed and can confuse the consumer. Remember that you must be covered by a qualified high deductible health plan with a deductible minimum of $1,250 and an out-of-pocket maximum ($6,350 individual and $12,700 family for 2014) with no co-pays prior to the deductible being met to continue to be an HSA owner.
In 2014 you should consider funding your HSA before you fund your IRA since the HSA has the tax deferment and tax-free growth of the IRA but has the added bonus of certain tax-free distributions.
Like your IRA, contributions to HSAs are limited and indexed by inflation annually. In 2013 that amount is $3,250 if you have no dependents on your insurance plan and $6,450 if you have one or more dependents on your plan. These maximums in 2014 will be $3,300 and $6,550 respectively. Remember that there is no “use it or lose it” provision with an HSA, so there should be no hesitation to fully fund the account.
If you are age 55 or older but under age 65, be sure to capitalize on the “catch up” provision of an additional $1,000 contribution allowance. If your spouse is also in this age range and you are both covered by a qualified health plan, we suggest you set up a separate account for her so that each of you may contribute the extra $1,000. Though there is legislation pending to change this rule, a double account is still necessary to maximize your contribution.
Additionally if you and your spouse are on the same plan you may split the $6,550 amount in the two accounts in any way that you like, it need not be split 50/50. You may want to put nearly all of the amount in one account to take advantage of investment options allowed by the trustee.
With tax-free distributions, you may continue to use funds in your account to pay for IRS-approved, medically qualified expenses for all your dep-endents (those family members on your tax return) regardless if they are on your health insurance plan or if a spouse is on Medicare. Over-the-counter medications may still be purchased through the account if you have a prescription for them on file.
It is commonly thought that one cannot add to an account if one is no longer covered by the qualified plan. Actually, you may continue to add to your account until April 15, or until you file your tax return, even if you are no longer covered by the QHDHP, as long as you did not exceed your allowed contribution
for the year while you were covered under that health insurance plan.
You may want to allow your HSA to grow and use personal funds to pay for medical expenses since this account, unlike a flexible spending account or health reimbursement arrangement, permits you to reimburse yourself many years after the claim was paid. There is no limit on the amount of funds that one can reimburse from the account as long as you maintain the receipts from those previous years in the event of an IRS audit.
Get a tax deduction on your premiums for long term care insurance and Medicare premiums (not Medicare supplements) by paying for these through your health savings account.
Shop around for a better return on your HSA. With the popularity of HSA-qualified plans, more financial institutions are offering these accounts to capture this expanding demand. This competition has understandably led to lower monthly fees, higher interest rates, debit cards, and investment options.
Beverly Gossage, owner of HSA Benefits Consulting in Lawrence, KS.