Health Savings Accounts what you need to know!

30 things you need to know about heath savings account by Jeffrey Brooks, CPA
Qualifying for an HSA is easy. You just have to not be covered under another health plan,
not be a dependent on another’s tax return, and be under age 65 (or not covered by Medicare).

1. Unlike many other tax breaks, there aren’t any income limits. Anyone who buys a qualified high-deductible policy can open an HSA, as long as they have not yet signed up for Medicare.
2. The tax benefits of both plans are quite similar between a flexible spending plan and an heath savings account , but there are several differences. The biggest and most important difference is that your HSA balances can roll over from year to year and continue to grow tax-deferred.
3. Money in your flex plan must be spent by the end of the plan year or you lose it. That may sound like a big negative. Also, you can open a flexible-spending account only if the plan is offered by your employer, and you don’t need to have a high-deductible health insurance policy.
4. You cannot have an HSA if you use a flexible-spending account to pay health-care costs or if you have other medical coverage.
5. You can keep the money in an HSA account even after you leave that job, similar to a 401(k). But you will get stuck with a 20% in addition to an income-tax bill — if you use any of the money for nonmedical expenses before age 65.
6. If you withdraw money after age 65, You won’t be hit with the 20% penalty if you use the money for nonmedical expenses after age 65, but you would still have to pay income taxes on the money. Keep in mind that you can continue to withdraw money from the account tax-free for qualified medical expenses after age 65.
7. Even if you plan on retiring early you can open a heath savings account. Anyone who has not signed up for Medicare can contribute to an HSA if he or she buys a high-deductible health insurance policy, and you can contribute an extra $1,000 if you’re 55 or older.
8. You can’t make new HSA contributions after you start receiving Medicare, but you can still use the money in your account tax-free for medical expenses at any age. You’ll owe income taxes on the money — but no penalty — if you withdraw the money for nonmedical expenses after age 65.
9. For some reason, there has been an erroneous rumor that contributions to an heath savings account affects the ability to contribute to an IRA. No. Your HSA contributions won’t affect your IRA limits. It’s just another tax-deferred way to save for retirement.
10. If you operate your business as a sole proprietor, S corporation, or single-member LLC, you can establish a health savings account (HSA) for yourself without having to contribute on behalf of your employees.
11. Your employees can contribute to their own individual high-deductible health plans and HSAs and then deduct the contributions on their personal tax returns.
12. If you wish, you can make contributions to your employees’ HSAs. You deduct your contributions as a business expense, and your employees receive the benefit of your contributions tax free.
13. If you contribute on behalf of employees, you must follow nondiscrimination guidelines called Health Savings Account comparability rules.
14. These complex rules are designed to prevent you from giving larger HEATH SAVINGS ACCOUNT contributions to highly compensated employees.
15. The S corporation may not make a pretax contribution to a more than 2 percent shareholder’s HSA. Contributions by an S corporation (S) to you as the shareholder employee for services rendered are treated as guaranteed payments and are deductible by the S corporation and includable in your gross income. You will have to record these dollars on your W-2.
16. The good news is that your S corporation can make the HSA contribution to you, the owner without having to making the same dollar contributions on behalf of the employees. Under the comparability rules, if you make contributions to one employee’s HSA, you must make comparable contributions to the HSAs of all participating comparable employees. Contributions are considered comparable if they are either the same amount or the same percentage of the deductible under the high-deductible health plan.
17. A full-time and part-time employees may be treated differently, as can those with family versus individual coverage. However, you cannot treat employees differently based on their age, or by whether they are management or nonmanagerial employees.
18. If you fail to follow the nondiscrimination rules, you face a stiff 35% penalty on your total HSA contributions.
19. The idea behind the HSA is simple: instead of purchasing traditional comprehensive health insurance, you obtain a high-deductible health plan (also called “major medical”) and then pair it with a tax-favored IRA-like HSA into which you make contributions and then dip into to pay uninsured health expenses.
20. In addition to the ability to contribute or not on behalf of your employees, the HSA offers the following benefits: The deductible for your high-deductible health plan must range from $1,200–$6,050 for individual plans and from $2,400–$12,100 for family plans. Health plans with such high deductibles cost less than plans with low deductibles or no deductibles. Just how much you can save depends on many factors, including the insurer involved, your deductible amount, and your health history, age, and where you live.
21. It pays to shop around for your high-deductible health plan. You can establish your HSA deposit account with any bank, insurance company, mutual fund, or other financial institution offering HSA products. We use our bank.
22. The amounts you deposit into your HSA are tax deductible, up to the annual limit. For 2012, the limits are $3,100 for individuals and $6,250 for families. If you’re over age 50, you can add an extra $1,000 to the limits.
23. Like an IRA, the money in your HSA grows tax free. Moreover, you can invest the money in your HSA in almost anything: money market accounts, bank certificates of deposit, stocks, bonds, mutual funds, Treasury bills, and notes. You can obtain a self-directed HSA that gives you complete control over how your money is invested.
24. You pay no federal tax on HSA withdrawals used to pay qualified medical expenses. However, if you use HSA funds to pay for nonmedical expenses, you pay a penalty of 20 percent plus regular taxes on the improper withdrawal.
25. Qualified medical expenses are broadly defined to include any expenses that would qualify for the medical and dental expenses itemized deduction. These include many expenses ordinarily not covered by health insurance—for example, dental care, optometric care, acupuncture, fertility treatment, and laser eye surgery. Thus, for example, you can withdraw money from your health savings account tax free to pay for eyeglasses.
26. I am repeating this warning because I am trying to avoid this problem occurring again: Once you reach age 65 or become disabled, you can withdraw your HSA funds for any reason without penalty. If you use the money for qualified medical expenses, the withdrawals are completely tax free. But if you use the money for nonmedical expenses, you pay regular income taxes on the withdrawals.
27. This means that, unlike all other existing tax-advantaged savings or retirement accounts, HSAs can provide a tax break when funds are deposited and when they are withdrawn. No other account provides both a “front end” and a “back end” tax break. With IRAs, for example, you must pay taxes either when you make the deposit or when you withdraw your money.
28. The front- and back-end benefit feature can make your HSA an extremely lucrative tax shelter—a kind of super IRA when you use the back end for medical expenses.
29. You have a number of reasons to consider the HSA. Perhaps most important, the HSA likely makes it possible for you to obtain a tax-advantaged health plan without having to cover your employees to get it. The ability to cover yourself and not your employees applies to the owners of proprietorships, single-member LLCs, and S corporations. It does not apply to owners of C corporations.
30. If you want to cover your employees, the HSA rules make it easy. Further, if you operate as a proprietorship, single-member LLC, or S corporation, you can contribute one amount on behalf of employees and a larger (or lesser) amount to your HSA without worrying about the discrimination rules.
Jeffrey Brooks, CPA

If you enjoyed this article, please consider sharing it!
Icon Icon Icon


No Obligation FREE Evaluation: Guaranteed to Reduce Your Taxes






About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

Get In Touch

JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009