Health Savings Account ownership is good news for your life financial goals

Health savings account possibilities are one of the best things to happen to a taxpayer! Contribution limit changes were confusing enough to cause most everyone to stumble into 2018 with misunderstandings brought about by the Tax Cuts and Jobs Act of 2017, but there is now more awareness of the advantages of owning an HSA. The contribution limits for the calendar year 2019 were recently increased to $3,500 for individuals and $7,000 for family coverage.

What really happened to health savings account contribution limits…and when?

On May 4, 2017, the Treasury Department and the IRS set the annual limitation on HSA contributions for an individual with family coverage under a High Deductible Health Plan (HDHP) at $6,900. People used this amount for payroll deductions and tax planning.

On March 2, 2018, because of new inflation adjustments, the IRS and the U.S. Treasury amended the May 4, 2017 increased limitations to the previous lower rate of $6,850.

Everybody freaked out. Costs to modify various systems to reflect the reduced maximum and the costs associated with distributing a $50 excess contribution would be greater than any tax benefit associated with an unreduced HSA contribution. Many taxpayers thought they would be targeted for audit and penalties through no fault of their own.

The Treasury Department and the IRS waved a white flag. Pretty much a clean slate for taxpayers whether they used the $6,900 limit or the $6,850. There are a lot of sentences that began with Accordingly, However, Alternatively, and Thus. Here is Rev. Proc. 2018-27.

More simply put, the whole mess was considered the result of a “mistake of fact due to reasonable cause.” The portion of a distribution (including earnings) that an individual repays to the HSA by April 15, 2019, would not be included in the individual’s income or be subject to the 20% additional tax. The repayment will not be subject to the excise tax on excess contributions. No foul.

In May, 2018, for the calendar year 2019, Rev. Proc 2018-30, set the annual limitation on HSA contributions for an individual at $3,500 and for an individual with family coverage, the limitation is $7,000. As in previous years, for people 55 and plus, an additional $1,000 can be contributed.

What is a health savings account?

A health savings account is one of the best things to happen to a taxpayer and almost makes a high deductible health plan feel like a pretty good deal.

That being said, this is a good place to first define an HDHP:

The IRS defines a high deductible health plan as one with a higher deductible than a traditional plan. The monthly premium is usually lower, but you pay more health care costs yourself before the insurance company starts to pay its share. Having an HDHP allows you to open a health savings account
For calendar years 2018 and 2019, an HDHP has an annual deductible that is not less than $1,350 for self-only coverage or $2,700 for family coverage. Annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,750 for self-only coverage or $13,500 for family coverage.

A health savings account is a tax-exempt, individually owned account which actually belongs to the account owner. Your HSA is a custodial account consisting of all funds both you and your employer contribute, interest earned, and any funds gained from eligible investments made within the account. The account belongs to you even if you change employers, and there is no “use it or lose it,” provision. Your HSA allows you to save for current eligible medical expenses and for future medical expenses, or future expenses. You aren’t required to pay for eligible medical expenses out of this account and have the option to pay current medical expenses out-of-pocket.

Are other benefits available from a health savings account?

Simply by establishing your HSA, you will have three easy-to-understand tax advantages:

Contributions that both you and your employer make to the HSA can be tax-free for you.
Interest and investment earnings are not taxed and,
Withdrawals to pay for qualified medical expenses are not taxed.

There are many other benefits available through your HSA that can establish your health savings account as a solid part of your overall tax strategy, health benefits program and part of your total life financial planning. Some of these less-known benefits include:

Your HSA may receive contributions from you or any other person, including an employer or a family member, on your behalf.
HSA contributions won’t affect your IRA limits. The HSA is a way to save additional funds for retirement and have the advantage over an IRA of allowing you to withdraw funds tax-free to pay for qualified medical expenses.
Other benefits would be so tightly connected to your own life goals that only close communication with your trusted CPA financial and tax specialist would help you decided your best choices.

Anything else?

Your health savings account can be a powerful tool in your overall life finance planning and for that reason should be considered during tax strategy meetings.

What’s the bottom line?

If you have never consulted with a CPA tax specialist, and have an interest in the tax strategy and financial life goals offered through this and other strategic opportunities, contact me now. Tax laws have changed dramatically and will continue to do so. Stay prepared, flexible and in control.

Our goal is to become part of your overall life goal planning team so that you will be able to set your own goals in place and know that you have a trusted professional on your team. We establish and maintain a personal and business relationship with our clients. Your LIFE is your business and your BUSINESS is your life, and we’re here for YOU.

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