This may be the most important retirement account you fund.
The ever-evolving healthcare landscape, particularly since the introduction of the Affordable Care Act (ACA), has significantly impacted how small business owners navigate their health coverage options. One standout solution that has emerged? Health Savings Accounts (HSAs). Let's dive into why HSAs have become the go-to for many small business owners and individuals alike.
Why HSAs Are on the Rise
The ACA eliminated many small-business health plans that reimbursed for individually purchased insurance, especially for businesses with less than 50 employees. This left business owners with two primary choices:
1. Provide no health coverage
2. Adopt HSAs
Furthermore, businesses that either didn't provide health coverage or didn't have any employees often opted to establish HSAs exclusively for the business owner. This trend indicates that HSAs have become essential tools in the small business health coverage toolkit.
HSAs: The New Mainstream?
Recent data from Devenir, a Minnesota-based HSA industry expert, sheds light on the popularity of HSAs. By the end of 2022, there were over 35 million HSAs with assets totaling around $104 billion. This rise in HSAs and their assets indicates a shift in how individuals and business owners are planning for healthcare expenses. With these figures, it's undeniable: HSAs aren't just a fleeting trend – they're here to stay.
Getting to Know HSA Basics
At its core, an HSA is a unique blend of savings, retirement, and medical payment account. To qualify, you need high-deductible health insurance. The HSA contribution limits vary based on the type of coverage you have, and specific rules apply to married couples.
Tax Advantages of HSAs
HSAs offer multiple tax benefits:
1. Deductions on your contributions
2. Tax-free growth of your investments within the HSA
3. Tax-free withdrawals when paying for qualified health care expenses
Contribution Nuances
The flexibility to contribute to your HSA extends up to April 15 of the following year, similar to IRAs. The HSA's contribution deduction is an above-the-line deduction, meaning taxpayers can avail of it regardless of whether they itemize their deductions. However, certain eligibility requirements need to be met, one of which is not being claimed as a dependent on someone else's tax return.
How to Use HSA Funds
HSA funds can be used tax-free for qualified medical expenses, including those of the account owner, their spouse, and dependents. If you maintain a good health record and do not withdraw from your HSA frequently, it can serve as a medical reserve, generating tax-free income. Moreover, specific rules benefit those reaching Medicare eligibility age, and in the event of the account holder's death, provisions exist for the surviving spouse.
Beware of Mixing HSAs with Other Health Plans
It's crucial to be aware that you can't contribute to an HSA if you're covered under another non-high-deductible health plan. Additionally, according to the IRS, HSAs and health care flexible spending accounts (FSAs) don't mix. You can't contribute to both in the same tax year.
Setting Up Your HSA
Setting up an HSA is akin to establishing an IRA. They can be set up at banks, insurance companies, or even brokerage firms. The focus of the HSA must always remain on covering the account owner's qualified medical expenses.
In Conclusion
HSAs are more than just a tax-saving tool; they represent a shift in how small businesses and individuals manage their healthcare expenses. With their growing popularity and the tangible benefits they offer, HSAs are shaping the future of healthcare financial planning.
Disclaimer: Laws and regulations are subject to change, and readers are advised to consult EPL advisors for personalized advice and compliance with specific state requirements. This information is not specific advice and is meant for general education.
You can reach our CEO and founder Peter Ellefson anytime at Peter@eplfs.com