Health Savings Accounts (HSAs) are a great way to set aside money to pay for both unexpected and expected medical costs. And an even greater benefit – you may qualify for a tax deduction! The tax benefits of an HSA are favorable and can be substantial.
An HSA is a tax-exempt trust or custodial account set up for an eligible individual to make contributions to pay qualified medical expenses. The individual must be covered under a high-deductible health plan (HDHP) to qualify to contribute to an HSA. As for the tax benefits of an HSA, the earnings accumulated in the HSA are free from federal income tax and funds can be withdrawn tax-free to payqualified medical costs. Also, eligible individuals who contribute to an HSA can deduct the contribution as an adjustment to their adjusted gross income.
A lot of our clients fund an HSA and let it accumulate tax-free to be used for medical expenses later in life versus pulling funds out every year to pay out-of-pocket medical expenses. This strategy allows the HSA to function like another Roth IRA retirement account. The earnings still accumulate tax-free, provided they are used for qualified medical expenses. Qualified medical expenses can include long-term care insurance and Medicare supplement premiums.
Business owners may also benefit from contributions on behalf of their employees. The employer-funded contributions are a tax-deductible expense to the employer and exempt from the employee’s federal income and payroll taxes.
The maximum annual contribution to an HSA for 2019 is $3,500 for single coverage or $7,000 for family coverage. All HSA contributions are aggregated when applying the annual contribution limit whether the contribution was made by an employee, an employer, or a family member. But be forewarned: if you contribute more than this annual limit, there is an excise tax of 6% imposed on the participant for any excess individual and employer contributions.
While an HSA might sound like a simple solution for both employers and individuals, there are certain requirements that a health plan must meet to qualify as an HDHP. It’s important to consult with a qualified financial advisor to ensure you’re doing things right. Speak with your trusted CPA or financial planner today to find out whether an HSA is right for you and your family.
Madeline Jackson, CPA
Madeline Jackson, CPA is a Staff Accountant with GranthamPoole, specializing in the areas of real estate and medical practices. For more information on the above article or any other TCJA or tax-related topics, please contact our Financial Planning Team Leader, Michael Denny, CPA, CFP® at 601.499.2400 or mdenny@granthampoole.com.
The above does not represent tax advice. Each situation is fact-dependent, and you should seek the advice of a competent advisor. GranthamPoole PLLC is a provider of tax, accounting, advisory and strategic services, partnering with clients across a broad spectrum of industries and sizes.