The Tax-Wise Way to Pay Medical Costs

Health Savings Accounts or HSAs, which taxpayers can use to help control escalating medical costs, have been around for several years now.

What is an HSA?

Essentially, it works like this:
Individuals and businesses buy less expensive health insurance policies with high deductibles. To qualify in 2019, participants must be enrolled in plans which require them to pay at least the first $1,350 of medical expenses, $2,700 for a family, before the insurance begins to pick up the tab (unchanged from 2018). The high deductible insurance is combined with an HSA.

Contributions to the accounts are made on a pre-tax basis. The money can accumulate year after year, tax-free, and be withdrawn tax-free to pay for a variety of medical expenses such as doctor’s visits, prescriptions, chiropractic care and premiums for long-term-care insurance.

Participating employers can also contribute to accounts on behalf of employees. HSAs enable self-employed people and businesses that currently do not have health insurance to utilize high-deductible plans with more affordable premiums.

HSAs are similar to Archer Medical Savings Accounts, but they have several advantages. With an HSA, both employee and employer contributions are permitted in the same year. Annual contributions are allowed up to 100 percent of the annual deductible, which in 2019 must be at least $1,350 for self-only and $2,700 for family coverage, and unused funds can be carried over from one year to the next. The Archer Medical Savings Account pilot program has been hampered by numerous restrictions and has not been widely used up to this point. Taxpayers with Archer accounts can now roll over their balances tax-free into an HSA.

These accounts also have some features of flexible spending accounts (FSAs), with one big difference: They do not have a “use it or lose it” feature. Unlike FSAs, you can carry over any unused funds to the next year.

If you withdraw money from an account and don’t use it to pay qualified medical costs, the withdrawal is taxable income and generally subject to a 10 percent penalty tax.

Another advantage:

HSAs are portable — meaning if employees change jobs, they can take the accounts with them.

The National Small Business Association gives the following example of how the new accounts could help employers save money: A small business with 15 employees now pays $72,000 in health insurance premiums a year for a policy with a low deductible. By switching to HSAs, it cuts its premiums to $40,000 a year by changing to a plan with a $2,600 deductible.

The business then contributes $1,000 to each of its 15 employees HSAs Employees contribute $1,500 each. The company’s total insurance cost is $55,000 with HSAs, compared with $72,000 with a low deductible policy. Employees get to keep any unused money in their accounts.

Want to know more about Employee Benefit Plans? Give us a call at 434.296.2156 or email us at info@hwllp.cpa.

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Health Savings Account Basics

Married couples filing jointly can set aside up to $7,000 in 2019 (up from $6,900 in 2018), tax-free, to save for medical expenses. For self-only plans the maximum contribution is $3,500 in 2019 (up from $3,450 in 2018).

Depending on your tax bracket, in 2018 you can save between 10 percent and 37 percent on any costs covered by money in your account.

Every year, the money not spent can stay in the account and gain interest tax-free, just like an IRA.

The accounts are beneficial for small business owners and their employees.

Reason:

More businesses can now cover workers for major medical problems, such as hospitalization for an injury or illness. Employees can use the accounts to cover doctors’ visits, lab tests and other costs.

Employers can contribute to employee accounts.

Neither employers nor employees pay taxes on money contributed to HSAs.