A health savings account, or HSA, can be a great strategy to reduce your health insurance expenses. As a refresher, an HSA is a tax-advantaged savings account that belongs to you. It is always paired with a qualified high-deductible health plan (HDHP) and unlike a traditional health plan an HSA/HDHP has a lower premium. Thus, you can put the premium savings into your HSA for maximum impact and that money in your HSA remains yours. It is often noted that an HSA offers a triple-tax savings: The money you put into your account is never taxed, your account and investment earnings grow tax-free, and you can withdraw your money tax-free as long as you use it for qualified medical expenses. The problem with most HSAs is that very little education exists to help participants maximize their investment. Here are six little-known tips & tricks for maximizing your HSA.
Last-Month Rule
The last-month rule allows individuals who are eligible on the first day of the last month of their tax-paying year (Dec. 1 for most of us) to contribute the full yearly maximum for your coverage type (individual or family). The last-month rule applies regardless of whether the individual was eligible for the entire year or had non-HDHP coverage for part of the year. If you are 55 or older, you can also contribute the entire $1,000 catch up contribution.
For example, Elyse’s HDHP coverage started on November 10, 2016. Because she had HDHP coverage by Dec. 1, she can contribute $3,350 into her HSA as if she had been in the HDHP the entire 2016 calendar year. Elyse will be able to make another $3,400 contribution to her HSA on January 1 for the 2017 calendar year.
The last-month rule however, comes with a testing period which requires that you remain enrolled in an HDHP for the entire subsequent calendar year (2017 in our example above). Failure to remain eligible requires you to pro-rate your contribution and include that amount as income.
Contributions are tied to the tax year
You have a lot of flexibility in deciding when to make your HSA contributions. You and your employer can make contributions in one or more payments at any time during the tax year. Contributions to your HSA are reported on the individual tax return and therefore are tied to the tax return for that year. Most individuals are calendar-year taxpayers which means contributions can be made between January 1st of a given year and April 15th of the following year.
Once Per Lifetime IRA Transfer
Opening an HSA for the first time can be daunting. You now have a high-deductible health plan and what happens if you get in an accident and your HSA isn’t yet fully funded? To help fund an HSA, an account holder can do a once-per-lifetime trustee-to-trustee transfer from a traditional or Roth IRA to the HSA. The transfer is limited to the maximum annual contribution for the year, and it reduces the annual amount that can be otherwise contributed. It’s a great way to kick-start your HSA. Keep in mind that if you never need to use your HSA money, the funds stay with you into the next year.
Your HSA can cover your spouses or children’s medical expenses even if they do not have a HDHP
Whether or not your spouse or dependent is covered by an HDHP, the money in your HSA can be used to pay for their qualified medical, dental, and vision expenses. There are certain IRS requirements that a claimed dependent must meet in order to receive HSA distributions on their behalf. Generally, children or legally adopted children under age 19 with incomes below the exemption amount are eligible.
The HSA/FSA Stack
It is true that you cannot use a traditional health flexible spending account (FSA) if you have an HSA. But for those really interested in maximizing the tax benefits available you can stack what is called a Limited Purpose FSA with your HSA. A Limited Purpose FSA can only be used to reimburse qualified dental and vision expenses as well as what is called “post-deductible” expenses. The IRS sets the floor for a HDHP’s deductible, regardless of your plan’s actual deductible; any amounts above the IRS minimum deductible are eligible for distributions from your Limited Purpose FSA.
For example, Jon wants to maximize his HSA in 2017 and sets up payroll deductions to contribute the full maximum for a family of $6,750. Then he elects to contribute $2,500 into his FSA (based on estimates for glasses and dental work). This equals $9,250 in income that Jon is able to protect from taxes. As an added benefit, the $2,500 from his FSA is available on day one (since these accounts are front-loaded).
There is no time limit on claiming reimbursement from your account
Many HSA users like to treat their accounts as long-term savings vehicles, paying for routine medical and dental expenses out of pocket while retaining their HSA balance so that it can grow with tax-free interest. The wonderful thing about HSAs is that there is no time limit for claiming a reimbursement from your account. Thus, at age 65 or later, you can pay yourself out of your HSA tax-free as long as you can tie the distributions back to eligible medical expenses that were incurred after the HSA was established. This requires good record keeping about contributions to your account and eligible expenses but the benefits of doing so can be tremendous.
Conclusion
The benefits of utilizing an HSA/HDHP can be significant for those that think and plan long-term. Good management means understanding all the nuances of how HSAs can be funded and utilized. Contact us today to receive a copy of our complete HSA Guidebook!
