One of the most underutilized 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. In my opinion, everyone should at least consider the HSA as an option when purchasing insurance.
This year in 2018, then ‘Open Enrollment’ for a 2019 health insurance plan runs from November 1, 2018 to December 15, 2018. Outside the Open Enrollment Period, you generally can enroll in a health insurance plan only if you qualify for a Special Enrollment Period.
The reason why it’s so important to think about an HSA plan during Enrollment Period is that IF YOU DON’T choose the right plan NOW, you can’t take a deduction and contribute to an HSA in 2019.
I don’t sell health insurance, but as a tax advisor I strongly encourage my clients to understand the power of an HSA. It really does surprise taxpayers when they find out what they are missing.
Essentially, the HSA is much like an IRA and operates as tax-favored savings account for health care. Except it’s better! You get a tax deduction when it goes in, it grows tax-free, and it comes out tax-free at ANY time, at ANY age, for a qualifying medical expense, which includes a long list of items. (See IRS Publication 502 for what qualifies as a valid/deductible medical expense).
The only requirement to qualify for one of these amazing accounts is that you have to use a qualifying high-deductible health insurance plan. Once you have the proper insurance, you can create an HSA account most anywhere (not where your employer dictates) AND EVEN self-direct it into alternative investments. I actually own a rental property in my family’s HSA- seriously!
May worry that they may not use the account for health care and have money stuck in it. Trust me- you’ll use it. Medical expenses at any age can devastate your finances. In fact, the number one reason for bankruptcy in America is medical debt (see here for the details at Motley Fool). But, if for some wild reason you’re a freak of nature and have incredible health into your old age, If you don’t use the saved money in your HSA for health care, you can use it as a typical IRA after age 59 ½.
PLAN NOW for 2019!!! Again, the only catch to qualify for the HSA and get a deduction during 2019, is that you have a high-deductible health insurance policy (“HDHP”) in place before the Enrollment Period is over on December 15, 2018. Yes, there are options during 2019 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 2018, you can still create and fund the HSA up until April 15, 2019, and take the deduction on your 2018 return. The deduction for 2018 is $3,450 if you are single, and $6,900 if you are married, or head of household.
Created by Congress in 2001, they are perfect for the individual or family who is ‘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 is 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. You can even day-trade, invest in cryptocurrency, silver, gold, small business or whatever you know best to make money. Yes, there are a few prohibited transactions to be aware of, but you would be shocked the flexibility and opportunities. To open your own self-directed HSA account go to www.directedira.com (this is where I set up and hold my HSA).
— The Government is fully behind the HSA. The Health Savings 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.
If you are unhealthy and don’t have the qualifying type of insurance, BUT still want a tax deduction for your out of pocket deductible, co-pays, medical expenses, prescription drugs, dental and even eye care, there is hope. If you own a small business, you can utilize what is called an HRA or Health Care Reimbursement Arrangement. Please see here for my article on the topic of HRAs.
However, if you are generally healthy and have a ‘choice’ as to what medical plan you are stuck with in 2019…PLEASE take a second look at the HSA. It could be one of the biggest tax saving strategies AND health care saving strategies of your life. Don’t underestimate the power of the HSA.
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.
