For the past 10 years, Colorado has offered individuals a way to manage rising healthcare costs: health savings accounts. These accounts enable employer and employee to contribute pre-tax dollars into an account that can be used to pay for healthcare expenses. When the deductible for out-of-pocket expenses is meet, insurance then covers for 100 percent of healthcare costs.
For Year 2016, the Internal Revenue Service announced new limits on contributions to health savings accounts and on the out-of-pocket deductibles to which they’re linked. Adjusting for inflation, the IRS set the following maximum rates for deductibles:
Federal regulators established the new, embedded, out-of-pocket (OOP) spending limits with the goal of not penalizing individuals for purchasing family coverage. Group plans with cost sharing benefits are affected. Beginning in 2016, no one member of a family must incur the maximum family deductible before insurance kicks in; the deductible for that person will cap out at the individual rate.
It should be noted that HAS and ACA deductibles differ, with ACA deductibles being higher.
For many individuals the OOP deductibles are painful. Organizations are urged to set their deductible limits at the minimum level, but let’s be realistic. For years, employers have been shifting the burden of health care plan coverage onto employees. Healthcare plan coverage is expensive and eats into the all-important profit margin. Employees already struggling with wage stagnation must decide whether to pay for expensive insurance premiums with low deductibles or for less expensive premiums with high deductibles. HSAs typically go hand-in-hand with high deductible insurance plans.
HSAs offer some relief to beleaguered employees in the form of progressive tax benefits. HSA accounts don’t suffer from the “use it or lose it” policies that govern flexible spending accounts. The deposited amounts can accrue year after year and earn tax deductible interest. Here’s where the tax advantages come into play. The funds deposited into the HSA are pre-tax, earn tax deductible interest, and, when withdrawn to pay eligible medical expenses, remain tax-free. Refer to IRS Publication 502
for a comprehensive list of qualified medical expenses, which includes long-term care.
There is a penalty for using HSA funds for non-qualified medical expenses. Doing that will result in the monies being taxed at your income tax rate plus 20 percent if you are under 65 years old.
The federal government anticipates that you won’t have medical expenses reaching you deductible and set contribution limits accordingly. For an individual, the 2016 contribution limit is $3,350; for family coverage, it’s $6,750. Those amounts may not seem like much, but if you’re on the cusp between tax brackets, then shifting those funds to an HSA could bump you down to a lower tax bracket. It’s worth investigating.
One might consider investing in an HSA while one is still young and healthy, because medical expenses have a way of increasing the older one gets. And when you’re ready to retire, you can roll the funds into a retirement account without penalty when you turn 65 years old.
There are restrictions on HSA eligibility; however, if you already have an HSA account and are not eligible to contribute to it due to those restrictions, then you can still withdraw from it to pay for medical expenses.
So, you’ve determined your eligible for and health savings account. What next? First you find a financial institution (most banks and many credit unions) that offer such accounts to set one up. Explore your options; some funds will offer better interest rates than others rather like the typical 401k retirement account. If you can arrange for your employer to deduct pre-tax income for deposit into the HSA account, that relieves you of one step. If not, you’ll have to declare the contributions on your annual tax filing to deduct the correct amount from your taxable income
When open season begins in November for health plan decisions, take a close look at your options. A high deductible health plan combined with a health savings account might work to your future tax advantage. Discuss the potential tax advantages of an HSA with the Denver tax professionals at Bloch, Rothman, & Associates, Ltd. Call (303) 321-7160 to schedule an appointment