Health Savings Accounts are Not as Simple as They Look

I recently sent an email to Jack that read:

Jack, under code section 223(b)8, if you are NOT in a high deductible Health Plan or also known as HDHP on 12-31-13, the entire deduction is disallowed. What is a HDHP. It is health insurance has a deductible over $1,249 for single coverage and $2,499 for family coverage.

Jack’s company has a deductible plan for family coverage of $2,450 and $1,200 for single coverage. Although the deductible is just shy of the required $2,500 and $1,250, Jack and his family are not eligible for a health savings account!
The next deductible up is $5,000 deductible for family coverage. If Jack has family medical bills of $4,995, he would have been better off going with the plan that is not eligible for the health savings account because the deductible is below the $2500 family and the $1,250 single coverage.

But what if Sally had a HDHP deductible of $5,000 until November 1 when she chose a low deductible single plan below the $1,250 deductible? Sally is not eligible to contribute to a health savings account.

What if Jack’s 65th birthday occurs in December and he goes on Medicare in December. According to the rules, Jack is not eligible to contribute to a health savings account because Medicare has a low deductible plan. Now if his company contributed on his behalf before December that is fine. Jack cannot contribute any additional dollars to an health savings account. Maybe Jack could have decided to start Medicare in January instead. His tax savings might have exceeded the reduced cost of Medicare insurance coverage over continuing one more month on his own company insurance.

Once Jack selects Medicare, he is no longer eligible to contribute to a health savings account.

Did you know that 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.

In addition to the ability to contribute or not on behalf of your employees, the HSA offers the following six benefits:

– 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).
– 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. It pays to shop around for your high-deductible health plan.
– The amounts you deposit into your HSA are tax deductible, up to the annual limit. For 2013, the limits are $3,250 for individuals and $6,450 for families. If you’re over age 55, you can add an extra $1,000 to the limits.
– Did you know that If you operate your business as a sole proprietor, S corporation, or single-member LLC, you can also deduct the premiums for your high-deductible plan.
– Many people younger than 65 years age (When eligible for Medicare), need away to get tax advantages especially now when medical expenses under 10% of adjusted gross income are not tax deductible for federal. The health savings account is the perfect solution!

Did you know that just like a deductible IRA that is deductible before adjusted gross income is calculated that just like an IRA, the money in your HSA grows tax free.

What I like about the health savings account is If you or a family member needs health care, you can withdraw money from your HSA to pay their deductible or any other medical expenses.

By the way, did you know that you do not pay federal tax on HSA withdrawals used to pay qualified medical expenses.
However, you need to be alert to the 20% penalty along with income taxes that you are stuck with if you use HSA funds to pay for non-medical expenses! To escape from such situation just consult with Phoenix accounting firm or CPA firm near your area.

And Once you reach age 65 or become disabled, you can withdraw your HSA funds for any reason without penalty.
The good news is If you use the money for qualified medical expenses, the withdrawals are completely tax free. But if you use the money for non-medical expenses, you pay regular income taxes on the withdrawals.

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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.

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JBrooks Wealth Advisors, PC.

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Address: 4647 N 32nd Street, Suite B245
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Phone: 602-292-2009