It’s Time to Remind Clients Why They Should Have an HSA
By Alayna Drope, CIS, CIP, CHSP
As our country fights through a global pandemic, many of your clients may be trying to determine the best way to save for their current health care expenses and for any future expenses that may occur. Health savings accounts (HSAs) continue to be a great way to offset the rising costs of healthcare. HSAs are IRA-like accounts that are tax-favored and designed to cover medical expenses incurred by the HSA owner, the HSA owner’s spouse, and his dependents. So—how can HSAs help your clients?
Another Way to Save
Healthcare costs are a major concern for Americans, with 46 percent reporting in a survey conducted by Lively that they have not gone to the doctor because of the associated costs. Lively also reported that only 60 percent of people have enough money saved to cover a medical emergency.
Heightened awareness for staggering healthcare costs and the increasing popularity of high deductible health plans (HDHPs) have driven HSA enrollment to new highs. In addition, HSA owners have continued to see their balances increase. According to a Devenir study, as of June 30, 2021, there were over 31 million HSAs with a combined $92.9 billion in assets.
HSA Contributions are Tax Deductible
Your clients may reduce their tax liability by contributing to an HSA through the following methods
HSA owners may deduct contributions (other than employer contributions) that they make or receive on their federal income tax return.
HSA owners cannot deduct contributions that are made through payroll deductions under their employer’s cafeteria plan. Instead, the contributions are excluded from the HSA owner’s taxable income and are reflected on the HSA owner’s Form W-2.
Employers may deduct contributions that they make to employees’ HSAs. These contributions are excluded from the employee’s gross income, are not subject to withholding for income tax, and are not subject to FICA, FUTA, or RRTA.
Earnings Grow Tax-Deferred
Earnings on HSA assets are not included in gross income (i.e., they remain tax-deferred) while held in your client’s HSA. In other words, any interest earned from an HSA investment will not be considered income for the year earned.
Access to “Tax-Free Money”
A key benefit of having an HSA is that assets may be distributed tax free if used to pay for qualified medical expenses incurred by either
the HSA owner;
the HSA owner’s spouse;
dependents that the HSA owner claims on her tax return; or
any person that the HSA owner could have claimed as a dependent on her tax return; except that
the person filed a joint return,
the person had gross income of $4,300 or more (for 2021), or
the HSA owner (or the HSA owner’s spouse if filing jointly) could be claimed as a dependent on someone else’s tax return.
NOTE: Children whose parents are divorced or separated, or who lived apart for the last six months of the calendar year may be treated as a dependent by each parent.
To be considered a qualified medical expense, the expense must be incurred after the HSA is established and generally must be eligible for the income tax medical and dental expense deduction. Qualified medical expenses include doctor’s fees, prescriptions, and certain dental and vision care (excluding most insurance premiums). IRS Publication 502, Medical and Dental Expenses, provides a detailed list and can be a great resource for your clients when they have questions about what constitutes a qualified medical expense.
Taking distributions to pay for a nonqualified expense will cause the HSA owner to pay taxes and possibly a penalty tax if removed without a penalty tax exception.
No Expiration Date on Funds
HSAs differ from flexible savings accounts (FSAs), which generally require individuals to spend assets by the end of the year. If not used, the assets essentially “expire” and the FSA owner gives up, or “loses” that money. HSA assets, on the other hand, do not have an expiration date. They may be left in the account and used to pay for qualified medical expenses in subsequent years—or not used at all, continuing to grow over time, even into retirement.
Education is Key
When your clients are looking for the best way to save for their current and future medical expenses, and for retirement in general, take some time to educate them about the benefits of having an HSA. Providing objective, accurate information is one of the best ways to build a trusting, long-term relationship with your clients.
