BGBC Partners, LLP Tax Update: Health Savings Accounts
With all the talk about changes to our health-care system, one thing seems assured – health care costs will continue to rise! That is why a health savings account (HSA) may be very beneficial for both your business and your employees.
HSAs have become very popular for that reason. Eligible individuals have the option of setting up an HSA through a qualified HSA trustee, and employers have the option of implementing such health plans that allow for an HSA. An HSA is a custodial account that allows individuals to contribute pre-tax dollars and use those funds for qualified medical expenses for that individual, his or her spouse, or dependents. The employer also has the option to contribute a fixed amount of money or match the employee's contribution.
There are certain qualifications that need to be met in order for an individual to qualify for an HSA. These qualifications define an "eligible individual." First, an individual must be covered under a high deductible health plan (HDHP). HDHPs have lower premiums, but higher deductibles. Thus, the initial out-of-pocket expenses may be higher. HSAs are designed to assist with those costs. The minimum deductible is $1,300 for single coverage and $2,600 for family coverage in 2017. The next qualifier is that the individual cannot be covered by any other health plan or be enrolled in Medicare. Lastly, an individual cannot be claimed as a dependent on another's tax return.
HSAs have tax benefits for both the employer and employee. If the employer decides to contribute to the employee's HSA account, the contributions are deductible in the year paid. The employer contributions are also excluded from the employee's compensation. In addition, any contributions the employee makes are made with pre-tax funds. Earnings on the account balance are nontaxable.
Annual contributions to an HSA are limited. For 2017, individuals may contribute up to $3,400 for single coverage and $6,750 for family coverage. This limit encompasses all contributions from the employee and employer. However, individuals 55 and older and not enrolled in Medicare may make catch-up contributions up to an additional $1,000 each year. An individual may contribute to an HSA account up to the due date of his or her tax return (not including extensions) for that tax year.
HSA distributions used to pay for qualified medical expenses are nontaxable. Distributions not used for qualified medical expenses are subject to ordinary income tax and an additional 20% penalty. Any unused funds in the HSA at the end of the year are not forfeited. The account continues to grow tax-free, and contributions may be made to the account year after year up to the annual contribution limit.
If you are considering changes to your health plan, be sure to consider an HSA as it may have many benefits for your business and your employees. Be sure to contact your tax advisor for more information.
