One of the most under utilized tax strategies by small business owners is the use of a Health Savings Account (“HSA”). It’s a fantastic tax savings strategy as well as a powerful tool to help pay for current and future health care costs. Everyone should at least consider the HSA as an option when purchasing insurance during the Enrollment Period (November 1st to January 31st).
Essentially, the HSA is much like an IRA and operates as a tax-favored savings account for health care. The only requirement to qualify for one of these amazing accounts is that you have a qualifying high-deductible health insurance plan. Once a you have the proper insurance, the HSA contribution is a deduction on the front page of a taxpayer’s Form 1040, and account grows tax free, while distributions can begin immediately and are tax-free for health care expenses. If you don’t use the saved money for health care, you can use it like a typical IRA after age 59 ½.
These little gems are amazing. Get a tax deduction, the money grows tax free, and comes out tax free for almost any medical expense…you can even self-direct your HSA and buy that cute little piece of real estate at auction down the street- Unbelievable!! To know what medical expenses qualify under an HSA, check out the LONG LIST in IRS Publication 502.
PLAN NOW for 2016!!! Again, the only catch to qualify for the HSA and get a deduction during 2016, is that you have a high-deductible health insurance policy (“HDHP”) in place before the Enrollment Period is over on January 31st. Yes, there are options during 2015 to get a proper insurance plan, but they are very limited and you must have a “Qualifying Event”, which is a whole other topic and beyond the scope of this article. Visit www.healthcare.gov for more information.
For those of you that had a high deductible plan in place during 2015, you can still create and fund the HSA up until April 15, 2015, and take the deduction on your 2015 return.
The deduction for 2015 is $3,350 if you are single, and $6,650 if you are married, or head of household.
Created by Congress in 2001, they are perfect for the individual or family who are ‘generally healthy’ and can afford or risk coming out of pocket for the little things and rely on a ‘high deductible’ insurance policy. Here’s a sampling of some of the benefits of HSAs:
— You save on taxes. Not only are HSAs pretax accounts, but contributions to them are deductible from your gross pay amount on the front page of your tax return, potentially putting you into a lower tax bracket.
— You can also spend the money tax-free. The caveat is that the money must be spent on qualifying health care expenses. The better news is that this tax-free rule on spending applies for the rest of your life. As long as you’re using the money for health expenses (and odds good that are you’ll have those when you’re older), in your retirement years your HSA could essentially act like a Roth IRA, in that, like a Roth, withdrawals after retirement are not taxed.
— You can save money on insurance premiums and health care costs. The HSA qualifying health insurance policy by its very nature has a lower premium and saves your business hard earned profits. Moreover, the ability to pay cash for health care costs allows you to negotiate for lower cost services and motivates us to be more healthy.
— An HSA can help pay for your retirement. After you turn 59 1/2, there is also the option to withdraw the money for non-health care expenses, and then pay federal income taxes on it. The HSA then acts much like a traditional IRA since the HSA holder pays ordinary income taxes on non-medical related withdrawals, with the added perk that you don’t have the mandatory disbursements usually required by traditional IRAs.
— An HSA can be an investment vehicle. HSAs allow you to invest the money in much the same way you invest an IRA. You can even invest HSA funds in real estate. So your health-care savings could also help you buy a rental property. It’s generally advisable, though, to stick more with liquid investments if you have a health condition or are at risk of developing one; you want the money available in case of a medical emergency. These accounts survived the recent federal health-care reform changes — the biggest overhaul of the health-care system since the 1960s, so it seems a safe bet that they’ll be around – and available to save you money – for years to come.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.